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Palm Poses Challenges for H-P

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

PALO ALTO, Calif. (

TheStreet

--

Hewlett-Packard's

(HPQ) - Get HP Inc. 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.

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"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 Apple Inc. 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 Nokia Oyj Report

and

Motorola

(MOT)

, not to mention

Google

(GOOG) - Get Alphabet Inc. Class C 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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