Opportunity Lands in H-P's Palm

Hewlett-Packard's $1.2 billion acquisition of Palm could turn the computer maker into a serious player in the booming smartphone market.
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PALO ALTO, Calif. (


) --


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$1.2 billion acquisition of beleaguered Palm (PALM)

could transform the computer maker into a serious player in the booming $100 billion smartphone market.

H-P has been selling smartphones for some years, but its iPAQ offerings have barely caused a ripple compared to


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Research In Motion's





Technology Business Research (TBR) estimates that the Palm deal will boost H-P from approximately 200,000 smartphone shipments, worth about $80 million in annual revenue, to approximately 4 million units and sales of $250 million to $300 million annually. With H-P's strong presence in corporate America, there has already been chatter that the Palm acquisition could

increase the pressure on RIMM's Blackberry


"Thanks to Palm, H-P gains a near-term advantage in handset shipments over its chief PC competitors, including




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," wrote Ken Hyers of TBR in a recent note. "The H-P acquisition

also prevents Palm's extensive smartphone expertise, IP and WebOS

operating system from falling into competitors' hands."

The biggest plus for H-P, though, comes from a technology that is only just making its presence felt.

Palm certainly plugs a gap in H-P's smartphone strategy, but also breathes new life into its

tablet efforts


Love it


hate it

, Apple's


has created a new market for large, touchscreen devices. H-P, as the world's biggest computer maker, can't afford to be left behind.

H-P Retooling Tablet

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Palm's highly-regarded WebOS will be key to this effort

. With multitasking capabilities, WebOS is a viable alternative to Apple's iPhone OS and


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Android software. Unsurprisingly, the operating system is seen as the jewel in Palm's crown, and there has already been

chatter that WebOS has ousted


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Windows 7


H-P's forthcoming tablet, dubbed the Slate


H-P said that it plans to continue as a Microsoft strategic partner during a recent conference call to discuss the Palm deal, but did not get into specifics of its tablet strategy.

Todd Bradley, executive vice president of the company's Personal Systems Group, nonetheless touted WebOS as a gateway into a new world of Web-based services during the conference call. "This platform enables cloud-based services such as over-the-air updates, online backup and messaging services," he said. The OS, he added, will now be extended to more devices than Palm had access to, a clear nod to the tablet opportunity.

Hurdles ahead

There are, of course, plenty of challenges in H-P's path before it can fully reap the benefits of Palm. Smartphones, for example, are a high-margin business, whereas H-P's expertise is more in low-margin areas such as

PCs and computer hardware


Other hurdles in H-P's path include competition from Apple, Google,


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, not to mention

integration hassles and luring app developers onto WebOS


Probably the biggest challenge for H-P, though, is one of perception, not technology. The smartphone market is dominated by popular culture and the vagaries of fashion in a way that most of H-P's business is not; Apple has set the bar for turning technology into a sort of lifestyle choice, touting an edgy design aesthetic that has resonated with millions of consumers. For H-P, buying IP is one thing, but buying street cred is something else altogether.

"The biggest challenge for H-P is to deliver a cool product," wrote Avi Cohen, an analyst at Avian Securities, in an e-mail to


. But he also noted that H-P has plenty of brand awareness. "I don't believe that consumers care so much about the brand, as long as it is a trusted source that is recognizable, and certainly, H-P is that."

There have also been questions asked about H-P's ability to drive further innovation out of a problematic Palm.

"H-P, in my mind, has always been an innovation company -- are they going to innovate with Palm or manage the cost?" Lanham Napier, CEO of



said to



During the conference call to discuss the Palm acquisition, H-P was similarly asked whether it would increase the phone maker's R&D budget, estimated by one analyst to be $190 million a year.

"We're going to be increasing that, we're going to be increasing the sales and marketing also," said Jim Burns, H-P's vice president of investor relations. "We're definitely going to be investing heavily in this over the next year."

And it's no question that Pre and Pixi maker was in

seriously poor health

when H-P rode into the company's Silicon Valley HQ.

Racked by a huge inventory oversupply, weak demand and intensifying competition, Palm saw its shares


in March, then warned that fourth-quarter sales would fall below $150 million, more than 50% below the analyst target of $305 million.

"One of the reasons Palm did not succeed was because there was a financial risk to team up with them," wrote Cohen. "If you were a carrier who did not know if Palm was going to survive, you would be less likely to align your brand with theirs."

H-P's buy of Palm was definitely risky, said Cohen, but the deal offers some low-hanging fruit for H-P.

With a cash haul of $13.7 billion exiting the first quarter, H-P certainly has deep pockets, although critics of the Palm deal have characterized the cash-rich tech giant as acting like a kid in a candy store. The phone maker, though, could ultimately end up being a sweet deal for H-P.

"The easiest thing that they can do that will also add value is to port the

WebOS to use in printer interfaces, handheld

devices, netbooks, etc.," he said. "That, and just a couple of points of share, will be more than enough to make this acquisition a success."

-- Reported by James Rogers in New York


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