Palm Poses Challenges for H-P

H-P's $1.2 billion acquisition of Palm is a bold move, albeit a risky one.
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PALO ALTO, Calif. (

TheStreet

--

Hewlett-Packard's

(HPQ) - Get Report

's

$1.2 billion acquisition of struggling handset maker

Palm

(PALM)

is a bold move, albeit a risky one.

"We have a low-margin company entering a high-margin business," Avi Cohen, director of research at Avian Securities, told

TheStreet

. "If they can make it work, it will be a good move because

H-P will be able to leverage their manufacturing resources and their supplier relationships."

Cohen, however, warns that H-P is entering a highly competitive market very different from its traditional world of servers, PCs and printers. H-P, which exited the first quarter with $13.7 billion in cash, certainly has the money to turn Palm around, but winning over smartphone consumers will not be easy.

"It's a question of design, and whether they can get it right," said the analyst, adding that popular culture dictates smartphone trends. "You could argue that

Apple

(AAPL) - Get Report

won the space by having things that are cool with an OS that works well."

In addition to the integration hassles that are part and parcel of M&A, another big challenge for H-P will be dealing with new competitors. These include smartphone makers such as Apple,

Nokia

(NOK) - Get Report

and

Motorola

(MOT)

, not to mention

Google

(GOOG) - Get Report

and its Android operating system.

H-P announced earlier today that it is buying Palm at a price of $5.70 a share. The deal has already been approved by the boards of both firms, it said, in a statement released after the market close.

The deal was not exactly out of the blue. Earlier this year, Palm gave

a tepid sales forecast

, citing

weak demand for its Pre and Pixi phones

, and prompting speculation about the company's future.

In a recent poll, some 65% of readers surveyed by

TheStreet

said that

a Palm acquisition was likely

, although many doubted the company's ability to command a $1.7 billion minimum price tag, as estimated by RBC Capital Markets.

The jewel in Palm's crown, of course, is its highly respected

WebOS

operating system, which was mentioned in the H-P press release discussing the deal.

"WebOS will allow H-P to take advantage of features such as true multitasking and always up-to-date information sharing across applications," it said.

Palm CEO Jon Rubinstein, who recently

trumpeted his firm's ability to survive

, is expected to remain with the company, according to H-P.

Long term, Avian Securities' Cohen believes that the deal is likely to shake up the smartphone sector. "H-P has very deep pockets, so they can push lots of money at being competitive," he explained in an email to

TheStreet

, adding that this could impact Apple, Nokia, Motorola and

Research In Motion

(RIMM)

.

Palm shares surged in extended trading, rising $1.25, or 27%, to $5.88. H-P's stock, in contrast, dipped 35 cents, or 0.66%, to $52.93.

-- Reported by James Rogers in New York

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