HP To Buy Palm For $1.2 Billion

Throwing a lifeline to beleaguered smartphone maker Palm, HP on Wednesday said that it has signed an agreement to acquire the company for $1.2 billion in cash.

HP is characterizing the deal as an opportunity to participate more aggressively in the lucrative smartphone market by combining its scale and financial strength with Palms innovative webOS. "Palm's innovative operating system provides an ideal platform to expand HP's mobility strategy and create a unique HP experience spanning multiple mobile connected devices," said Todd Bradley, EVP of HP's Personal Systems Group, in a statement. "And, Palm possesses significant IP assets and has a highly skilled team."

In a conference call on Wednesday afternoon, Bradley described the deal as transformational. "Together, HP and Palm will make a powerful combination," he said.

Asked why HP would buy its own operating system instead of just building on Google's open source Android operating system, Bradley did not address the question. He said instead that HP would continue to be a strategic partner with Microsoft and stressed that webOS represented an opportunity for HP to offer its own high-quality customer experience.

He also suggested the webOS would end up powering not only smartphones but netbooks and tablet devices.

The merger agreement, which must be approved by the boards of both companies, calls for Palm stock holders to receive $5.70 per share in cash, a 23% premium on Palm's $4.64 per share closing price on Wednesday.

HP said it expects the deal to close in its third fiscal quarter, which ends on July 31.

"It's probably fair to say that this pulls Palm back from the almost-dead, and considering that Palm went shopping for a buyer, there are worse places it could have ended up than with HP," said John Madden, an analyst with Ovum, in an e-mail. "HP obviously felt the need for a higher-profile mobile OS strategy."

For Palm, which has struggled to compete against Apple's iPhone, RIM's Blackbery, and Google's Android devices, the deal puts webOS phones back into play and may, with the power of HP behind it, be enough to bring new developers to the platform.

A survey released earlier this month by Ovum found that the most popular mobile platforms for developers were Apple's iPhone OS, RIM's BlackBerry OS, Microsoft's Windows Phone OS, Google's Android OS, and Symbian's OS in that order.

Only 30% of developers said they planned to support platforms beyond the top five, such as LiMo and webOS.

Palm has "2,000 applications and growing," Bradley said. Android has over 50,000 and the iPhone has almost 200,000.

According to AdMob's March Mobile Metrics report, about 3% of smartphones in the U.S. are running Palm's webOS. During that month, about 46% of devices in the U.S. ran the Android operating system and about 39% ran Apple's iPhone OS.

Madden sees the deal helping HP in the enterprise market as well as the consumer market.

"HP has shown that it's not afraid to step up and make investments where it sees potential growth and where it can get increased wallet share from enterprise customers (EDS-services, 3Com-networking)," he said. "Although this deal may be more consumer-focused, HP probably sees potential in the enterprise/service provider market and vertical industries as well."