Hewlett-Packard Agrees to Acquire Palm for US$1.2 bil.

Computer giant Hewlett-Packard (HP) has announced that it will acquire smartphone manufacturer Palm in a deal that values the company at US$1.2 billion, including its cash and debt. HP is to pay US$5.7 for each share of Palm, which represents a premium of 23% to Palm share prices prior to the announcement.

Outlook and Implications

• What Went Wrong with Palm? Palm’s story as an independent company ended essentially on the back of its flagship phone, Pre, of which sales have fallen well short of the expectations ever since it was launched in June last year. Purely as a device, Pre was actually a rather good one, and its failure to sell owes chiefly to shortcomings outside Palm’s research and development (R&D) functions. Most of all, Pre lost much of its momentum straight upon its launch, as it entered the U.S. market through an exclusive distribution contract with low-cost carrier Sprint, which did not have much of a track record in pushing higher-end gadgets to the consumers; this distribution bottleneck, together with Palm’s own marketing failures, meant that Pre never capitalised in full on the positive reviews it received. At the same time, the vendor’s operating system WebOS did not gain enough critical mass (or, alternatively, buzz) to attract application developers, which kept the selection of Palm’s app store very limited. Palm might have succeeded better if it had positioned Pre more as an enterprise gadget, with dedicated business apps, but for a consumer device it simply failed to stand out from Apple’s iPhone and RIM’s BlackBerry.
• HP Brings More Competition to Smartphone Market: For HP, the greatest assets in the purchase are arguably the aforementioned WebOs, as well as Palm’s patent portfolio. Both these basically give HP (whose own smartphone iPaq has attracted very little traction), a head start in making converged devices. The firm has already indicated that it plans to use WebOS to power its own tablet/e-reader devices, (similar to Apple’s iPad), which could be launched late 2010 or early 2011. In general, HP’s sheer size, distribution reach and marketing prowess mean that it should in theory have the potential to turn Palm’s R&D potential into popular products. The biggest risk, on the other hand, is probably that the idea of being part of the computer giant, which as an organisation has a rather different culture if compared to generally more youthful smartphone industry, may scare off some of Palm’s R&D talent; the buyer might, thus, be better off if it will not be overly zealous in the consolidation of the operations. All in all, the acquisition is likely to turn the already-crowded smartphone market into an even more competitive space, especially in the U.S. market. A new dose of price competition might well eat into the margins of the established players, such as Apple, RIM, and HTC, and also set to make the market less accessible for likes of Nokia and Samsung, which have thus far struggled to make an impact there.