HP to Buy Struggling Palm as Ticket into Smartphone Market

HP to Buy Struggling Palm as Ticket into Smartphone Market

Smartphone maker Palm, which wasn't able to find a way to outflank Apple and its phenomenally selling iPhone during the last nine years, has decided to make a graceful exit by accepting a $1.2 billion buyout offer from Hewlett-Packard.

Palm sold only 408,000 phones last quarter; in contrast, Apple sold 8.7 million iPhones in the same time period.

On the other hand, HP, the world's second-largest IT systems provider, now re-enters a business in which it has had limited visibility and success: connected telephones. But smartphones aren't the only product for which HP is investing so much cash on hand in Palm.

Todd Bradley, executive vice president of HP's Personal Systems group and a former Palm executive, told a Webcast audience April 28 that HP sees not only a $100 billion smartphone market (and one that is growing by 20 percent per year) to tackle but also new opportunities making "additional connected mobile form factors."

Bradley didn't say it outright, but the implication was that we may see an HP/Palm-branded tablet computer to compete with Apple's super-hot iPad.

"We anticipate that with the WebOS [Palm's proprietary mobile operating system], we'll be able to aggressive deploy an integrated platform that will allow HP to own the entire customer experience, to nurture and grow the developer community, and provide a rich media experience for our customers," Bradley said.

Analysts, at least off the top on April 28, were divided on what this means to HP, Palm and the IT industry in general

"I am very surprised at this," Gartner analyst Ken Dulaney told eWEEK. "I am puzzled from what I've picked up-that they [HP] want to use WebOS on tablets and netbooks. I don't know why they'd go after that market. I don't see much upside in this.

"WebOS still needs a lot of work. HP's going up against Nokia and other big players. They're also a partner of Microsoft; this isn't going to make Microsoft very happy.

"The best thing I could say about this is that they get a really good group of people in Palm, whom I have a lot of respect for, and it gives them an organization that is much stronger than what they've got for the smartphone business."

Remember the iPaq?

Technology Business Research analyst Ken Hyers told eWEEK, "HP is making the move to give it a serious smartphone business that it can sell into enterprises. It already had a smartphone business, the iPaq, that it inherited from Compaq, but it was merely a blip on the market screen."
 
HP has been a player in the smartphone market for years, and no one really knows about it, Hyers said.

HP Is Getting Some Good IP, People

When compared with handsets rolled out over the years by the likes of Nokia and Apple, and now all the Android-based phones, Hyers said, "HP devices just could not compete. They still sell [iPaqs] through their enterprise business, but it's so small that ... you just never see HP's line of devices."
 
What HP is getting in this deal is a company that, while it had its financial and marketing woes, still makes solid devices, Hyers said. "And brings with it the PalmOS, a very good mobile operating system. Palm also comes with a lot of solid IP [intellectual property]. On the other side, Palm is coming to a company that has vast resources and strong channels into the enterprise. And it's really the enterprise that is the key here."

Forrester analyst Charles Golvin said he thought the transaction was a good news-bad news deal.

"The good news is that HP made a strong move toward becoming a player in the mobile market," Golvin said. "The bad news is that it's the wrong move.

"Palm could be valued for its brand, its intellectual property, its platform or its people. HP doesn't need the Palm brand; the IP helps an existing player, not a new entrant; we don't think the WebOS platform is viable[in the] long term in the face of its competition. HP could sweep up Palm's people individually at a much lower price. HP needs a strong presence in mobile, but Palm doesn't deliver that."

iSuppli wireless communications Tina Teng said, however, "The battle for dominance in the high-tech world increasingly is focused on the mobile Internet. Any company that can manage to control the flow of revenue from wireless data users-coming from subscriptions, ad sales or app store revenues-stands to benefit enormously. With the Palm purchase, HP has positioned itself as a player in this great technology battle."

Leave it to the lawyers

Later in the day April 28, the New York-based law firm of Levi & Korsinsky announced that it is investigating Palm's board of directors "for possible breaches of fiduciary duty and other violations of state law" in connection with the transaction.

The investigation concerns whether the board of directors "breached their fiduciary duties to Palm stockholders by failing to adequately shop the company before entering into this transaction and whether HP is underpaying for Palm shares, thus unlawfully harming Palm stockholders."

Levi & Korsinsky noted that Palm shares traded at $14.14 per share as recently as Jan. 15, and that "at least one analyst has set a price target for Palm stock at $14.00 per share."

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Editor's Note: eWEEK Senior Editor Jeff Burt contributed to this story.