HP buys Palm

Hewlett-Packard is buying struggling smartphone maker Palm.

The deal should bring global distribution channels to Palm, while giving HP a stake in the fast growing smartphone market.

Speculation earlier this month suggested Chinese PC maker Lenovo would purchase the smartphone maker.

Palm once dominated the handheld market but has since been surpassed by Apple's iPhone, Research in Motion's BlackBerry and the impact of Google's Android mobile operating system.

Palm had already cut its revenue expectations for the current quarter, due to slow sales.

"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."

HP said the deal for Palm valued the company at $1.2bn including debt.

Analysts said HP 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.

HP's foray into the smartphone market may put pressure on Nokia, Motorola and other device manufacturers now battling to increase their market share.

"Nokia will be one of the most affected players," said IDC analyst Francisco Jeronimo. Because of a "wrong portfolio and lack of carrier support, Nokia never moved from its eighth position...in the smartphone segment. This deal puts also pressure on Motorola and HTC."

Others were more sceptical about HP's ability to turn around Palm, whose Pre and Pixi phones have not sold as well as expected.

"If HP wants to have a global role in the mobile space, spending $1.2bn in Palm is not the way. Palm has no brand outside the US, and it has no distribution outside the US," said John Strand, chief executive of Strand Consult.

"To pay $1.2bn for a US-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," he added.

According to Gartner, Palm held 1.2 per cent of the global smartphone market in 2009, compared with Nokia's 41.1 per cent, RIM's 19.9 per cent and Apple's 14.4 percent.

Some investment bankers had thought that Lenovo was the leading candidate to buy Palm after the US company was rebuffed by other potential Asian buyers including HTC and Huawei.

Palm now expects its fourth-quarter revenue to be $90 million to $100 million, compared to a mid-March forecast of less than $150 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 store now has more than 2,000 applications, compared to Apple's App store with 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.

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