SAN FRANCISCO (Reuters) - Hewlett-Packard Co (HPQ.N) announced a $1.2 billion deal to buy Palm Inc PALM.O, betting it can resuscitate the struggling smartphone maker to compete with the likes of Apple Inc (AAPL.O) and RIM RIMM.O.
The news on Wednesday was a surprise to many on Wall Street, since much of the long-running takeover speculation surrounding Palm had shifted in recent weeks to focus on potential Asian bidders, such as China’s Lenovo (0992.HK).
An early pioneer in handheld devices, Palm once dominated the market but has since been surpassed by Apple’s iPhone and Research in Motion’s RIM.TO BlackBerry. Palm put out a new mobile operating system, webOS, last year but even that has been overshadowed by Google Inc’s (GOOG.O) Android software.
In a sign of Palm’s struggles, the company on Wednesday slashed revenue expectations for the current quarter, saying slow product sales have led to low order volumes from carriers.
“If you saw the guidance Palm just put out, it was clear they had to sell,” said Phil Cusick, analyst at Macquarie Research. “Given how quickly Palm’s business was falling off and how fast their cash was going out the door, they’re lucky to get what they got.
Shares of Palm, which is 30 percent owned by private equity firm Elevation Partners, jumped 27 percent to $5.88, above HP’s $5.70 cash offer. Some investors could be betting on a higher bid, while others could be covering short positions on the heavily shorted stock.
HP said the deal for Palm, which both boards have approved, valued the company at $1.2 billion including debt. Based on Palm’s latest filing, the deal values Palm’s 167.892 million shares outstanding at $957 million.
Analysts said HP was one of the Palm brand’s best bets for survival since the No. 1 PC maker has deep pockets to invest in Palm, can expand its carrier relationships and negotiate better component pricing from existing suppliers.
“PC companies don’t need cellphone-type margins to make the model work; they can be much more price-aggressive in capturing share and will certainly drive margins down for everyone else,” said Avi Cohen at Avian Securities.
Others, however, were much more skeptical about HP’s ability to turn around Palm, whose Pre and Pixi phones have languished in the face of fierce competition.
“If HP wants to have a global role in the mobile space, spending $1.2 billion in Palm is not the way. Palm has no brand outside the U.S., and it has no distribution outside the U.S.” said John Strand, chief executive of Strand Consult.
“To pay $1.2 billion for a U.S.-centric mobile player that’s not successful is a first-class way to destroy shareholder value. Palm has tried to move from the PDA world into the mobile world for eight years without success,” Strand said.
According to Gartner, Palm held a 1.2 percent share of the global smartphone market in 2009, compared to Nokia’s NOK1V.HE 41.1 percent, RIM’s 19.9 percent and Apple’s 14.4 percent.
Despite Palm’s shortcomings, persistent takeover rumors have attracted many investors to the heavily shorted stock. For example, Philip Falcone’s hedge fund Harbinger Capital Partners LLC bought Palm shares on April 12, when they were trading between $5.43 and $6.29, and had a 9.48 percent stake.
Some investment banking sources had thought that Lenovo (0992.HK) was the leading candidate to buy Palm after the U.S. company was rebuffed by other potential Asian buyers including HTC Corp (2498.TW) and Huawei HWT.UL.
Palm now expects fiscal fourth quarter revenue in the range of $90 million to $100 million, compared with its mid-March forecast that revenue would be less than $150 million. It estimated it would end its fiscal fourth quarter with a cash balance of between $350 million and $400 million.
Todd Bradley, executive vice president of HP’s computer division, said the company plans to “invest heavily” in Palm, increasing spending on sales and marketing and research and development in the hope of spurring the developer community into writing more applications for the platform.
Palm’s app universe now has more than 2,000 applications, dwarfed by Apple’s App store, which has closer to 200,000 apps.
Bradley also said Palm’s platform is attractive for an entire ecosystem of mobile devices, from smartphones to slate devices to netbooks. “Coupled with our scale, global reach and investments in the ecosystem, we expect we will see solid growth,” he said.
HP already has a smartphone, the iPaq, which runs on Microsoft’s (MSFT.O) Windows mobile platform. But the device has gained little traction in a crowded market.
Palm’s current chairman and CEO, former Apple executive Jon Rubinstein, is expected to remain with the company, HP said in a statement, adding that the acquisition would likely close during its third fiscal quarter ending July 31.
Shares of HP fell 1 percent to $52.75 in extended trading from their New York Stock Exchange close of $53.28.
Bank of America Merrill Lynch advised HP, while Goldman Sachs advised Palm.
Reporting by Gabriel Madway; Additional reporting by Sinead Carew, Alexei Oreskovic, Edwin Chan, Ian Sherr, Franklin Paul, Tarmo Virki and Jessica Hall; Writing by Tiffany Wu; Editing by Carol Bishopric, Phil Berlowitz