HP Faces Rocky Road With Palm Buy

Analysts offer little hope that the $1.2B deal will make HP a major smartphone player.

Analysts say it's no sure bet that Hewlett-Packard Co. 's planned $1.2 billion purchase of Palm Inc. will prove successful. In fact, an IDC research note gives it only a one in four chance of working out.

At the close of the deal, expected by July 31, HP will gain a struggling smartphone business and the means to create a tablet to take on Apple Inc.'s iPad , though such a project would take at least a year.

"HP needs a strong presence in mobile, but Palm doesn't deliver that," said Charles Golvin, an analyst at Forrester Research Inc.

Golvin said HP would have been better off -- and spent a lot less -- by simply trying to hire away Palm's top engineers. By acquiring the company, HP gets the Palm brand and its intellectual property, neither of which it needs, he said.

And, Golvin added, Palm's WebOS mobile operating system is probably not "viable in the long term in the face of competition."

Analysts also cited the smartphone makers's lack of success in Europe, and the dearth of WebOS applications -- fewer than 4,000 apps have been developed for Palm's operating system, while 150,000-plus iPhone apps are now available through Apple's App Store.

Gartner Inc. estimates Palm's share of the U.S. smartphone market to be 4.3% and its European share a barely visible 0.2%.

Nonetheless, the combined company will have to quickly find ways to better compete worldwide against handhelds running Google Inc. 's increasingly popular Android mobile operating system, market leader Nokia Corp.'s top-selling Symbian-based devices and the iPhone.

After announcing late last month that the deal had been struck, HP executives said the company will quickly increase Palm's $190 million research and development budget while funding new 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 a former Palm CEO.

Steve Hilton, an analyst at Analysys Mason, suggested that HP should build WebOS-based smartphones for corporate users. HP could "dislodge RIM and Nokia" by taking advantage of its powerful corporate sales and marketing organization, he said.

Bradley noted that HP is also looking to use Palm's technology in its effort to make inroads in the fledgling tablet computer market. WebOS currently runs only on mobile phones. "We see opportunities beyond smartphones," said Bradley. IDC estimates that about 7.6 million tablets will be sold this year and that sales will reach 50 million by 2014.

Analyst Jack Gold at J.Gold Associates LLC said a strong tablet offering could significantly boost HP's revenue. "Since tablets are primarily front ends to the Internet, it allows HP to deploy many cloud-based services from which it can generate revenue," he said.

Like other HP acquisitions overseen by CEO Mark Hurd, the integration of Palm will likely involve a lot of operational oversight, said Charles King, an analyst at Pund-IT Research. People in Palm's marketing and sales groups will probably lose their jobs, but the engineering talent will likely be highly valued, he said.

Judging from the way HP handled its acquisitions of Electronic Data Systems and 3Com, King said, "I believe they will keep the folks on board who understand the product, and they'll maintain the brand."

Palm is best known for creating the PDA market with the iconic PalmPilot, which came out in 1996. The company lost its footing when the PDA business stalled and it was slow to move to smartphones.

Palm CEO Jon Rubinstein, best known for his role in developing Apple's iPod, will stay with the company.

Gohring is a reporter for the IDG News Service. Agam Shah and James Niccolai of the IDG News Service contributed to this story.

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Copyright © 2010 IDG Communications, Inc.

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