HP-Palm Deal Faces Mixed Reviews

Includes: BBRY, HPQ, PALM
by: Streetwise Blog

By Andrew Willis

Hewlett-Packard’s (NYSE:HPQ) bid for troubled smartphone maker Palm (PALM) is getting mixed reviews on Wall Street, and signals Research In Motion (RIMM) may have been well-advised to steer clear.

Morgan Stanley dropped HP from the “Best Ideas” list that its analysts send to clients early Thursday, hours after HP unveiled its $1.2 billion cash offer for Palm. The Wall Street heavyweight did continue to recommend investors overweight HP, and kept its price target on the stock at $65 (U.S.)

We believe HP's acquisition of Palm makes long-term strategic sense,” said Morgan Stanley analysts Katy Huberty and Mathew Schneider in a report. “HP will gain control of the WebOS platform - a strategic (and scarce) asset that can be leveraged across multiple devices with attractive growth characteristics.”

However, the analysts warned that “near term, the challenge will be to balance the investment needed to stabilize the WebOS platform while limiting dilution/losses.”

“Although HP said fiscal 2011 dilution will be minimal, we believe many will be more skeptical given current losses at Palm,” said Morgan Stanley’s team.

To the extent Research In Motion was interested in Palm, the sentiment in Morgan Stanley’s report shows RIM would have struggled to sell the deal to investors. RIM already has operation systems running with its BlackBerry devices - it would have faced duplication that does not exist at HP.

While RIM's system has its bugs, analysts and investors would have been skeptical about the Waterloo-based company's ability to effectively merge two operating systems, and justify the capital and resources needed to turn around Palm.