Analysts Are Mixed on Value of Palm to Hewlett-Packard

Analysts were split over Hewlett-Packard’s agreement to buy struggling smartphone maker Palm for $1.2 billion (CED April 29 p7). The acquisition will make HP a more significant player in the growing smartphone market. But analysts said Thursday that Palm’s devices have been relatively weak sellers.

Palm’s purchase “seems to be a good fit for HP,” said Dave McQueen of Informa Telecoms & Media. But he said, “It will be interesting to see how the combined organization will operate, particularly as neither HP’s Windows Mobile business focused devices nor Palm’s webOS handsets have been particularly successful in the mobile handset market.”

McQueen said he’s “not convinced the Palm devices will add much to HP’s portfolio,” especially considering their “relatively poor sales, build quality.” He added, “It appears that HP intends to use webOS in other device types, much as Apple has extended” the iPhone operating system to the iPad, but “there are still issues with awareness and applications development, which is paramount to success in the smartphone market.” It’s not clear whether the purchase means that HP “will not make Android smartphones” and will instead “focus solely on webOS devices,” he said. That “could prove to be a restrictive strategy in the fast growing smartphone market,” McQueen warned. “Distribution is key, as Google recently learned. Traditionally, HP has a very good distribution network … but it will need to work closely with mobile operators, a weakness of Palm’s, in order to succeed."

Keith Bachman of Bank of Montreal Capital Markets said he’s “modestly against” the purchase, because, he estimated, it will dilute HP’s fiscal 2011 results 1 percent, Palm “is not a current leader in the mobile operating sector,” and he “would have preferred HP continue to buy companies in the enterprise sector, particularly software.” But Bachman called buying Palm “a relatively low-cost bet” for HP “to materially improve its consumer business model” by adding webOS to consumer devices. The acquisition has “longer-term potential,” he said.

Tina Teng of iSuppli was more upbeat. The purchase will give HP “an entry into the fast-growing smartphone market -- but the move has implications far beyond cellphone hardware,” she said. “The battle for dominance in the high-tech world increasingly is focused on the mobile Internet. Any company that can manage to control the flow of revenue from wireless data users -- coming from subscriptions, ad sales or app store revenues -- stands to benefit enormously. With the Palm purchase, HP has positioned itself as a player in this great technology battle."

Palm was the No. 10 smartphone brand in Q4 2009, accounting for 1.5 percent of world unit shipments, up from 1.3 percent in Q4 2008, Teng said. Although Palm “has made limited headway in the smartphone market,” she said, the company’s Pre smartphone “offers significant advantages compared” to the iPhone, and webOS “appears to be superior to the Mac OS X used in the iPhone in the crucial area of multitasking capabilities."

Palm began exploring a possible sale as it struggled in the smartphone business against Apple and Research In Motion. In the deal, Palm stockholders will receive $5.70 in cash for each Palm common share. HP said it’s expected to close before August.

HP believes the purchase of Palm “is a transformational deal in the connected mobility market, opening up opportunities for further profitable growth by leveraging the unique strengths of Palm, along with the unique strengths of HP,” Todd Bradley, executive vice president of HP Personal Systems, said on a conference call Wednesday. HP “dramatically accelerates the assets needed to deliver compelling connected mobile experiences” through the purchase, he said.

The connected mobile-device market “presents a significant opportunity for profitable growth,” with smartphones alone more than a $100 billion annual business, Bradley said. “We see further opportunities beyond smartphones into additional connected mobile form factors,” he said. HP is getting access to “a strong operating system to deliver a unique customer experience in applications to over 2,000 apps and growing, a platform to deliver mobile cloud-based services, and an opportunity to drive preference in the market among consumers,” he said.

Bradley declined to say whether HP plans to make deals with music and video content providers for mobile devices like those Apple has made. Details of HP’s strategy will be released after the purchase is completed, he said.