Why Is HP Buying Palm?

Computer maker Hewlett-Packard announced today that it will acquire smartphone maker Palm for $1.2 billion in cash. The reason for the acquisition is clear: HP wants to be a bigger player in the lucrative smartphone market. Currently, it has a rather poor showing with its iPaq model. Yet, Palm also has a pretty weak market share. It's a little hard to see how this acquisition will be a boon for HP.

First, Palm's operating system accounts for just 0.7% of the market, according to IT research firm Gartner. Bloomberg says that HP's is even smaller. So HP will instantly go from virtually no presence in smartphones to a very, very tiny presence in the market. That's not exactly a major foothold.

To make matters worse, Palm has been a disastrous company for some time. Bloomberg also notes:

While Palm has a bigger presence in the phone market than Hewlett-Packard, it too has struggled to match the appeal of Apple's iPhone, RIM's BlackBerry and phones using Google Inc.'s Android software. The company's Pre and Pixi phones, released last year in a comeback bid, didn't sell as well as expected. The company has reported 11 straight quarterly losses.

This is hardly an acquisition where HP can sit back and let the synergies work their magic. HP will have to invest heavily in Palm to make it a major player. Chiseling away at the market share of the smartphone titans listed in the block quote above won't be easy. It will take some major innovation to attract new customers to an HP/Palm device. Unfortunately, HP has not been one of the foremost names in technological innovation for some time, with Apple, Google, Samsung and others leading the way.

And yet, HP will purchase Palm for a 23% premium over its share price. That's sort of like if a home buyer purchased a house for that needed a lot of work for more than its market value. The premium shows the clear winner in this transaction: the Palm shareholder. It's hard to complain about a 23% premium on a stock that has scored 11 straight quarterly losses. Whether HP shareholders will be better off with this acquisition, however, will take some years to determine. HP must see some potential for Palm to perform significantly better under its watch.