Palm finds a buyer and maybe new life

Hewlett-Packard will pay $1.2 billion for the maker of the Pixi smart phone. But the deal raises a host of questions, too.

By Charley Blaine Apr 28, 2010 6:53PM

Updated at 6:50 p.m. ET

If you still own Palm (PALM), you have to be absolutely thrilled that Hewlett-Packard (HPQ) is willing to pay $1.2 billion for the company.

The reason: The odds were very good that Palm would cease to exist, perhaps by the end of the year, maybe earlier.


Instead, your shares will be bought for $5.70 a share -- in cash -- and the company will become part of one of the strongest players in the technology industry.

And there's the possibility of another bid. At least that's what some investors believe because they pushed the stock to $5.86 after hours -- 18 cents more than what HP is offering.  China's Lenovo is supposed to be interested in Palm.

HP investors weren't so happy; shares were down 1.1% to $52.70 after hours. But that's a modest hit to the stock.

HP's offer comes after Palm spent millions developing its Palm Pixi smart phone to compete with Apple's (AAPL) iPhone, Research In Motion's (RIMM) BlackBerry family of devices and phones that use Google's (GOOG) Android operating system.Palm Inc.

The problem was that it couldn't get much acceptance of its product with the big wireless companies. It has been carried by AT&T (T) and Verizon Wireless and Sprint (S), but the phones have been also-rans against competitor devices.

Last month, Palm said it expected less than $150 million in revenue in its fiscal fourth quarter, shocking analysts who were expecting about $285 million. Today, it cut the forecast again -- to $90 million to $100 million. The quarter ends on May 31.

Assuming it wins Palm, Hewlett-Packard would gain control of Palm's WebOS operating system, which has won praise for its technical virtues even if sales have been weak. HP would add  muscle behind the development of new devices built on the operating system.

And the cost would be very modest, compared with slowly building up a brand of its own phones. Buying a mobile-phone company would be hugely expensive. Research In Motion sports a market capitalization of some $40 billion.

HP said Palm CEO Jon Rubinstein will join Palm after the deal closes. That's expected in late July.

Perhaps happiest of all in the Palm-HP linkup is private equity firm Elevation Partners, which owns 30% of Palm.

The deal has one potentially large loser, Canaccord Adams analyst Peter Misek told CNBC this afternoon: Microsoft (MSFT), the publisher of MSN Money.

Microsoft has had plans to partner with Hewlett-Packard on phones using its new Windows Phone 7 software. But the phones would not be available before the end of 2010.

Microsoft shares were up 0.2% to $30.91 but fell 0.5% to $30.75 after hours after the Hewlett-Packard/Palm news broke.

The Windows Phone 7 operating system would replace Windows Mobile, which has not fared well against the iPhone, BlackBerry or Android-based phones.

Hewlett-Packard said Microsoft remains "an important partner" on mobile devices.

Dell (DELL) is also expected to offer a mobile device using the Microsoft operating system.

But HP's buying Palm does not mean the WebOS system will be a success.

Some observers like this deal. It says HP "is serious about becoming a player in smart phones," wrote Dean Takahashi on Mobile Beat. "While the entrenched players have done a fine job stoking interest in smart phones, HP is a much larger company that -- while it isn’t nearly as cool as Apple --  appeals to the masses."


Others disagree. Dan Frommer of Silicon Valley Insider thinks the deal will fail. "Consumers haven't found a need to buy Palm devices instead of Apple or Android devices," Frommer wrote on Forbes.com.


And developers don't seem to care either, he said. "Without unique apps, there's no reason to have a unique platform."

There's already a potential lawsuit brewing. Finkelstein Thompson, a Washington, D.C., firm, says it's "investigating potential claims" against Palm. The issue: The stock was trading at $17.07 on Oct. 1 and has crashed to as low as $3.71 in March.
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