3 Reasons Why HP Is Buying Palm

by: Yankee Group

By Carl Howe

HP’s (NYSE:HPQ) announcement that it is acquiring Palm (PALM) today for $1.4 billion ($1.2 billion after factoring in Palm’s cash and debt) isn’t the most obvious deal in the world. But it does offer something for, if not everyone, at least three major players:

  1. Palm gets an attractive exit. The version 1 Palm Pre and Pixi had the unfortunate luck of being launched against the iPhone 3GS and a plethora of second generation Google Android phones. Palm needs patient development money to reach the point where it is as mature as those platforms, and patience is not a virtue most venture capitalists boast. This deal lets Palm’s investors recoup most of their money, and Palm gets to refine its software.
  2. HP gets a smartphone backup plan. HP has committed to Windows Mobile for the last decade, and it has done nothing for the company’s smartphone business. Given the declining trend in Windows Mobile currently and the untested future of Windows Phone 7, the Palm acquisition gives HP a much-needed hedge for its smartphone business and avoids pinning all its hopes on Microsoft (NASDAQ:MSFT).
  3. Bradley gets some tablet options and his old developers back. HP EVP Todd Bradley was CEO of Palm in the early 2000s and ran PalmOne, so this acquisition will be just like old times. Palm gives him a suite of developers who he knows and frankly, a sexier platform to build Anywhere connected devices on. In fact, the Palm WebOS has many attributes in common with Google (NASDAQ:GOOG) Chrome, but doesn’t require licensing software from the Mountain View seach giant. In a market soon to be filled with Windows 7 and Chrome tablets made by companies ranging from Asus to ZTE, Palm gives Bradley the opportunity to load up software that is a lot more differentiated and a lot less “me too.”

Is this going to change the balance of power in the market? The simple answer is no. Apple, Android, and RIM (RIMM) are going to be occupying places 1, 2, and 3 in the smartphone market for the foreseeable future, leaving Palm to fight with Nokia (NYSE:NOK) and Windows Mobile (and later Windows Phone) for the #4 spot. However, it does keep HP in the smartphone game without betting the entire smartphone farm on an untested Windows Phone 7 strategy. Sometimes, it’s just nice to have a backup plan.

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