Palm deal shows HP's Hurd still pinching pennies

BOSTON (Reuters) - Hewlett-Packard Co HPQ.N Chief Executive Mark Hurd came to the company in 2005 with a reputation for cost-cutting and ruthless efficiency.

And as seen in Thursday's bargain-bin deal to purchase ailing smartphone maker Palm Inc. PALM.O for $1.2 billion, Hurd's penny pinching tendencies dominate even in the high-stakes realm of mergers and acquisitions.

“Hurd is very focused on not overpaying for deals,” says Daniel Flax, an analyst at money manager T. Rowe Price who follows the company. “Clearly, HP is only buying assets when they think they are reasonably priced.”

By grabbing Palm and its WebOS operating system for mobile devices for $5.70 a share, Hurd is paying less than one-third the price at which the shares traded just six months ago. And after selling fewer than 500,000 of its smartphones in the most recent quarter versus sales of 9 million of Apple Inc's AAPL.O iPhones, Palm has plenty of room for growth.

The deal follows the pattern of other high-profile acquisitions under Hurd, like network device maker 3Com last November and tech services provider Electronic Data Systems Corp two years ago.

“He has a knack for buying companies that have fallen from grace and trying to fix them,” said Kaufman Bros. analyst Shaw Wu. “He definitely likes bargains. So far it has worked, but of course the jury is still out on 3Com and Palm.”

The strategy stands in stark contrast to rivals like Cisco Systems Inc CSCO.O, Apple or Google Inc GOOG.O, which tend to pay rich premiums to acquire market leaders and high-flying start-ups.

Apple and Google recently dueled over acquiring fast-growing mobile advertising network operator AdMob, which had only recently turned cash flow positive.

After Google grabbed the start-up for $750 million, Apple paid a reported $275 million for even smaller competitor Quattro Wireless. The entire mobile ad market totaled just $416 million in 2009, according to research firm eMarketer.

Cisco, wanting to expand its consumer offerings, shelled out $590 million for closely held Pure Digital Technologies Inc, the leading seller of low-cost digital video cameras. And in 2008, Cisco paid $215 million for email start-up PostPath, which was backed by a total of just $30 million in venture capital to that point.

HP is buying Palm after its shares had dropped 54 percent this year and its well-reviewed WebOS phones have largely failed to catch on with consumers.

Similarly, 3Com’s market share had fallen for years in the United States and Europe. The company’s only real success was in China, where it undercut Cisco products on price by as much as 40 percent.

The company stayed alive for years after the Internet bubble burst, thanks to $1 billion it raised spinning off Palm in 2000.

HP’s playbook to profit from these low-risk acquisitions will be similar, analysts said -- leverage HP’s vast sale force and closer relationships with retailers to sell more products and invest heavily in next-generation gadgetry.

“I think it’s a smart gamble,” Kaufman Bros. analyst Wu said of the Palm deal. “They spent basically a month of cash flow. Could they lose? Of course, but it’s not that big of a deal for them.”

With more than 300,000 employees, HP is a giant, sprawling enterprise; but Hurd has proved himself more than willing to branch into new businesses when they can improve the company’s margin profile.

Hurd grabbed EDS for $13 billion in 2008 after the consulting and services firm founded by Ross Perot in 1962 was treading water. EDS's stock price had gone nowhere for the previous five years and its market share and operating margins were far behind those of market leader International Business Machines Corp IBM.N.

Hurd’s style of wheeling and dealing stands in contrast not only with those of competitors but also with his predecessor, Carly Fiorina.

Fiorina was pilloried for agreeing to buy rival Compaq Computer for $25 billion in 2001 to create the world’s largest seller of PCs and servers.

Almost a decade later, the sometimes contentious merger is viewed as a success, thanks in part to Hurd’s efficiency drive. Investors hope he will have an easier time profiting from the Palm deal.

Additional reporting by Aaron Pressman, editing by Gerald E. McCormick