HP Shakes Up Smartphone Market With $1.2 Billion Palm Buyout

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Hewlett-Packard Co. (NYSE: HPQ) today (Thursday) bought Palm Inc. (Nasdaq: PALM) in a $1.2 billion deal that marks a giant step by the computer firm into the burgeoning smartphone market and brings to a close speculation about a struggling company that was running out of options.

The deal will catapult H-P, the world's largest tech company in terms of revenue, into direct competition with a handful of other tech giants – including Apple Inc. (Nasdaq: AAPL), Google (Nasdaq: GOOG) and Microsoft (NYSE: MSFT) – in the rapidly growing smartphone market.

H-P said it would pay $5.70 a share in cash for Palm, representing a 23% premium over its Wednesday closing price.

Palm, a one-time pioneer in mobile personal devices with its Palm Pilot, has been in a losing race to keep up with Apple's iPhone, Research In Motion Ltd's (Nasdaq: RIMM) BlackBerry and devices running Google's Android software. The company recently hired bankers to explore a sale amid weak demand for its newest phones, the Pre and Pixi.

The deal immediately gives HP a bigger presence in the smartphone market, where worldwide sales rose 24% from 2008 to 172.4 million in 2009, according to market-research firm Gartner Inc. (NYSE: IT). HP sells a line of iPaq phones that run Microsoft's Windows software but it has yet to gain much traction in the highly competitive market.

Shane Robison, chief strategy and technology officer at H-P, maintained the company was making the purchase mostly to get its hands on Palm's Web OS operating system, which has won rave reviews in the tech world since it launched early last year. HP executives hinted that they would use the software to tap into the market for larger "tablet" computers to rival Apple's iPad.

"It's an opportunity for us to get into a very big market," Shane Robison, H-P's chief strategy officer, told The Wall Street Journal in an interview Wednesday.

The deal puts a new slant on the competition between some of the world's biggest tech companies as they maneuver for position in the expanding market for smartphones and tablets. In the past, H-P has cultivated a strong relationship with Microsoft in the PC business, but the Palm merger will put it at odds with the software giant in the smartphone operating system market.

"This will probably anger Microsoft," Ken Dulaney, an analyst at Gartner told the Financial Times. He also questioned H-P's decision to spread its efforts across different operating systems, adding: "They've got a lot of work to do on both fronts."

The purchase is intended to jump-start H-P's smartphone business by bringing both technology and developers from Palm, Robison told The Journal.
Palm also brings a portfolio of more than 1,000 patents to the table, which will make it easier for the company to carve out a place in the market, Robison said.

The deal also is the latest in a string of purchases for H-P, which is currently sitting on a $13.6 billion cash hoard.  H-P Chief Executive Officer Mark Hurd scooped up tech-services company Electronic Data Systems for $13.9 billion in 2008 and networking company 3Com for $2.7 billion last November.
Palm's shares plunged by 75% in the last six months as the Silicon Valley-based group failed to stimulate enough sales to convince investors it could remain an independent company.

Palm also revealed on Wednesday that its smartphone sales and cash reserves had plummeted even further than previously thought.

The company said revenue this quarter was likely to reach only $100 million, compared to the $300 million Wall Street had been expecting.  It also said cash holdings would fall to $350-$400 million by the end of May from $592 million in February, stoking fears that it could run out of cash before the end of the year.

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