Hewlett Packard's Risk Is Much Needed

By Michael Comeau  APR 29, 2010 9:00 AM

It may not work, but it's a step toward competing in an Apple dominated world.


Bye bye Palm (PALM)! Takeover rumors have been swirling around the beleaguered smartphone maker for weeks, and indeed, Hewlett-Packard (HPQ) just announced that it's acquiring Palm for $5.70 a share, a 23% premium to Wednesday's close.

But Palm didn't stop there -- the stock went as high as $5.95 in after-hours trading, indicating that shorts were desperate to cover, and/or there's a chance that another suitor is lurking about.

First things first -- if you own Palm, take the money and run. Deals can and do fall apart for a variety of reasons and you don't want to be caught holding the bag -- especially because Palm also lowered fourth-quarter guidance in an SEC filing. It now sees sales of $90 million to $100 million versus a consensus of $165 million.

HP sounds very unlikely to back out, but you never really know, and trust me -- you don't ever want to hear the phrase "material adverse change."

But does this deal actually make any sense?

Let's examine some numbers.

HP is on track to generate a whopping $123 billion in sales this year. That's big. Really really big. Palm is miniscule in comparison with a roughly $1 billion annual revenue stream that is actually shrinking -- so forget about it attaining the exponential growth required for it to make a dent in HP's massive bottom line.

Palm is also losing money right now, and those losses will only get bigger because HP is going to have to drop tons of cash into Palm to revamp product development and marketing.

Now, let's look at what really matters -- the fact that HP is actually doing something exciting.

HP is one of Microsoft's (MSFT) Windows Phone 7 hardware partners -- a relationship that will likely be severed as a result of this deal. I can't imagine that HP will be eager to support a competitor to the Palm webOS operating system it now owns, and as far as I'm concerned, that's a very good thing.

Owning and marketing proprietary technology is the only way to avoid the commoditization wave that's taken over the smartphone and PC industries. (See The Great Smartphone Bear Market). I actually think it's better for HP to take a risk on its own newly owned operating system, rather than just churning out look-alike Android or Windows phones. Besides, those operating systems will always be there so it's not like HP can't come back to them later.

Palm CEO Jon Rubinstein told Engadget that webOS was "the whole point" of the deal. Brian Humphries, HP's senior vice president of strategy and corporate development, for his part, said that HP is "doubling down on webOS." So we can expect to see tablets and netbooks powered by webOS in the future, giving HP a chance to step out from its Windows-dominated product lineup.

Ladies and gentlemen, this is bold, and exactly what's required to compete in an increasingly Apple (AAPL)-dominated world. So even if this deal turns out to be a total flop, it's the right thing to do.

Well done HP, well done!
Position in AAPL

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