HP to buy struggling Palm for $1.2 billion

IDG News Service - Hewlett-Packard plans to buy struggling phone maker Palm for US$1.2 billion.

The announcement, which came just after the U.S. stock market closed on Wednesday, follows rumors this week of a number of suitors, including Lenovo and HTC, vying to buy the iconic brand.

Palm last year released a new operating system, WebOS, that now runs on two phone models. But amid tough competition from Apple's iPhone and Google's Android phones, Palm struggled to sell the phones. During its last earnings call, Palm said it had a large inventory of phones that hadn't yet been sold and that future earnings would be lower than expected.

The acquisition should provide a much-needed infusion of cash to maintain development of Palm's technologies. "The focus now goes from financials to what the devices can actually do," said Chris Hazelton, an analyst at the 451 Group.

HP said it will increase the $190 million that Palm spends each year on research and development, and fund additional sales and marketing activities.

"We intend to invest heavily in product development and go-to-market capabilities to drive this market," said Todd Bradley, vice president of HP's personal systems group and formerly a CEO of Palm, during a conference call to discuss the deal.

While HP hopes to gain a bigger slice of the growing smartphone market, it also hopes that Palm's technology can help it make inroads in the fledgling market for slate computers. "We see additional opportunities beyond smartphones," Bradley said, mentioning slate, or tablet, computers. Palm's WebOS currently runs only on phones.

The slate market could be a key growth area for HP, said Jack Gold, analyst with J. Gold Associates. "Since tablets are primarily front ends to the Internet, it allows HP to deploy many cloud-based services from which it can generate revenues, including those in an app store, streamed services, etc.," he said.

Using WebOS instead of Windows on an HP tablet would represent new competition for Microsoft. HP has already said its first tablet will run on Windows 7.

HP also sells Windows Mobile phones but has a very small presence in that market overall. "HP's Windows Mobile phone business is dying a rapid death," Gold said.

Bradley said vaguely that HP will continue to be a strategic partner for Microsoft, but it was unclear whether he meant in the phone business or only the PC business.

Buying Palm to boost its phone business, rather than designing new phones to run on Microsoft's latest phone software or choosing Android, could save HP time and expense, Gold said. "Palm brings HP a modern and competitive platform that is already designed, implemented and in production. This saves HP many R&D dollars as well as dramatically accelerates time to market," he said.