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Admin Khan
04-29-2010, 09:45 PM
H.P. to Pay $1.2 Billion for Palm


With its $1.2 billion purchase of Palm (http://topics.nytimes.com/top/news/business/companies/palm_inc/index.html?inline=nyt-org), Hewlett-Packard (http://topics.nytimes.com/top/news/business/companies/hewlett_packard_corporation/index.html?inline=nyt-org) signaled that it would take drastic action to remain relevant to consumers whose tastes in computing devices were radically changing.

H.P., the world’s largest computer maker, on Wednesday revealed its plans to acquire the struggling maker of the Pre and Pixi smartphones. The deal gives H.P. access to Palm’s homegrown software that can run phones, as well as other types of devices like computer tablets. H.P. has historically worked with partners for such technology — a strategy that has resulted in plummeting smartphone sales and tardiness in introducing mobile products.
For Palm, H.P.’s acquisition represents a lifeline for a company that had recently put itself up for sale after consumers failed to respond to its new smartphones.
Analysts were quick to say that H.P.’s deep pockets and clout with retailers and carriers should breathe new life into Palm. Still, they also warned that melding a pair of flagging mobile phone businesses comes with obvious challenges.
“This is still a work in progress to say the least,” said Kevin Restivo, an analyst with the research firm IDC.
H.P. has agreed to pay $5.70 a share for Palm. The total value of the deal, which includes investments made by Elevation Partners, is $1.4 billion, although H.P. is paying about $1.2 billion after factoring in Palm’s cash and debt.
Palm listed $400 million in debt at the end of its third quarter, which H.P. would retire using some of the $592 million in cash that Palm has on hand.
Shares of Palm were down slightly on Wednesday, closing at $4.63. After the acquisition announcement, investors pushed the Palm shares higher by 27 percent to $5.89 in after-hours trading. Shares of Palm had fallen from a 52-week high of $18.09 a share.
Both H.P. and Palm have been on the wrong side of the smartphone explosion that has occurred over the last three years and been driven by companies like Apple (http://topics.nytimes.com/top/news/business/companies/apple_computer_inc/index.html?inline=nyt-org) and Research In Motion.
H.P. has been selling a smartphone version of its iPaq hand-held device since 2007, although few consumers knew H.P. even made cellphones because the devices were primarily aimed at businesspeople.
Over the last three years, sales (http://www.nytimes.com/2010/02/24/technology/24hewlett.html) of iPaq products fell to $172 million in 2009, from $531 million in 2007. In H.P.’s most recent quarter, the iPaq sales plummeted to just $25 million, from $57 million in the same period in 2009.
While it sells more PCs than any other company in the world, according to the research firm IDC, H.P. does not even make the top 20 when it comes to smartphones. The gap in sales is more startling considering that smartphones are hand-held computers.
Analysts have forecast that sales of smartphones, currently about equal to the annual sales of laptops, will surpass total PC sales by 2012. When discussing the acquisition of Palm, H.P. executives noted that such growth figures for the smartphone market helped persuade them to make a bold, risky move.
“The attractiveness of the smartphone market is compelling to us,” said Todd Bradley, executive vice president for H.P.’s personal systems group who joined H.P. in 2005 after serving as Palm’s chief executive.
Palm had spent years working up to the 2009 release of its Pre phone — a product meant to challenge the runaway success of Apple’s iPhone (http://topics.nytimes.com/top/reference/timestopics/subjects/i/iphone/index.html?inline=nyt-classifier) and products from Research In Motion, the maker of the BlackBerry.
Palm hired a number of talented engineers to build its own brand of mobile device software, including some of Apple’s iPhone engineers. Its chief executive, Jon Rubinstein, was one of the Apple executives responsible for the creation of the sleek iPod (http://nytimes.com.com/mp3-players/apple-ipod-fifth-generation/4505-6490_7-32069546.html?tag=api&part=nytimes&subj=re&inline=nyt-classifier).
Mr. Rubinstein is expected to remain with the company, although his role was not made clear Wednesday by H.P.
Palm accounts for about 5 percent of smartphone sales (http://www.nytimes.com/2009/12/18/technology/companies/18palm.html?_r=1) in the United States, according to IDC. Palm was also slow to recognize the important role that applications made to run on smartphones played on increasing smartphone sales. Palm has only several hundred applications (http://www.nytimes.com/2009/06/24/technology/companies/24palm.html) while Apple and Android apps number in the tens of thousands.
In February, Palm warned of weak demand for its products. It recently put itself up for sale. Computer makers like H.P., Dell (http://topics.nytimes.com/top/news/business/companies/dell_inc/index.html?inline=nyt-org) and Lenovo were mentioned as possible suitors, as was the Taiwanese smartphone maker HTC.
To date, H.P. has relied on Microsoft (http://topics.nytimes.com/top/news/business/companies/microsoft_corporation/index.html?inline=nyt-org) as its supplier of mobile phone and tablet computer software. The company has also started dabbling in Google (http://topics.nytimes.com/top/news/business/companies/google_inc/index.html?inline=nyt-org)’s mobile software, Android.
Mr. Bradley declined to say whether H.P. would continue to make smartphones or tablets that run Microsoft’s Windows software.
By purchasing Palm, H.P. has signaled much more of a go-it-alone stance. H.P. intends to sell phones and what it calls slate computers based on Palm’s software, Mr. Bradley said.
The slates H.P. has in mind are similar to Apple’s iPad (http://topics.nytimes.com/top/reference/timestopics/subjects/i/ipad/index.html?inline=nyt-classifier), and H.P. is considering making versions of the devices for customers in different markets like health care and education.
Mr. Bradley said H.P. intended to “broadly and aggressively deploy” Palm’s software, which also suggested that H.P. was calculating the value of Palm’s library of patents in its offer.
Palm has 452 patents and another 406 applications on file. Pete Conley, a managing partner at MDB Capital, a research firm that analyzes the value of intellectual property, valued Palm’s portfolio of patents at approximately $1.4 billion.
“It gives them a unique competitive advantage and is an area that a lot of other players are just now catching up on,” he said.
For example, Palm’s OS can run several tasks at once, like a computer does. Apple’s iPhone OS will not be able to multitask until later this summer. Palm also owns patents around structuring visual elements in a mobile operating system that could come in handy when developing innovative user interfaces, he said.
In addition, Palm filed a patent for visual search that could portend next-generation mobile search. “When you think about conducting search by recognizing visual images, Palm’s idea could be very valuable there,” he said.
Mr. Restivo from IDC has been critical of H.P.’s position in the smartphone market, noting that companies like Apple and R.I.M. appear to be passing it by. Other analysts have criticized H.P. for ignoring consumers. On paper, the Palm purchase reverses these trends.
“First and foremost, this is a bet on consumer smartphones,” Mr. Restivo said. “H.P. is betting this is still a nascent market and it can make hay in it.”
Through its sales of corporate products like computer servers, software and storage systems, H.P. has less visible but deep ties with the telecommunications carriers that could help promote devices based on Palm’s technology. Because of H.P.’s broad line of PCs, printers and other consumer electronics, it also has considerable leverage over electronics retailers around the world for scarce shelf space.
The deal also bails out Elevation Partners’ investment in Palm. Palm took $460 million in financing from Elevation, a private equity (http://topics.nytimes.com/top/reference/timestopics/subjects/p/private_equity/index.html?inline=nyt-classifier) firm based in the Silicon Valley whose investors include Bono (http://topics.nytimes.com/top/reference/timestopics/people/b/bono/index.html?inline=nyt-per) of U2 (http://topics.nytimes.com/top/reference/timestopics/organizations/u/u2/index.html?inline=nyt-org) and the venture capitalist Roger McNamee.
The firm, which has also invested in Forbes and the Web site Yelp (http://topics.nytimes.com/top/news/business/companies/yelp/index.html?inline=nyt-org), is expected to receive about $485 million from the H.P. deal.
Michael J. de la Merced contributed reporting.


Source:
http://www.nytimes.com/2010/04/29/technology/29palm.html