Here is a piece by IDC analysts about HP buying Palm, in line with what I was saying earlier:
HP Picks Up the Call to Acquire Palm; Makes Bet on Next Era of Computing April 28, 2010
By: Danielle Levitas, Scott Ellison, William Stofega, Richard Shim, Crawford Del Prete
Hewlett Packard announced on Wednesday, April 28, 2010 it has entered into a definitive agreement to buy smartphone hardware and operating system company Palm. The deal is valued at $1.2 billion, or $5.70 per share, and has been approved by the boards of directors at HP and Palm. The deal is expected to close during HP's third fiscal quarter ending July 31, 2010.
The acquisition breathes new life into the struggling Palm, which will be able to take advantage of HP's global scale and financial resources to boost growth. The purchase by HP is arguably the best exit strategy the beleaguered Palm could have asked for. For HP, the purchase is a modest risk at establishing a firm position in the fast growing smartphone market, acquiring an OS, and diversifying its connected mobile device strategy. Also culturally, given the number of senior HP PSG employees that were once at Palm, this acquisition should be relatively easy for HP to integrate.
The acquisition gets HP a seat amongst the leaders in the consumer smartphone market (augmenting its own commercial smartphone efforts) and it gives good talent to grow share in the industry. (There are an estimated 300+ former Apple staff at Palm and Palm?s chairman and CEO, Jon Rubinstein, is expected to remain with the company.) This deal positions HP as a player that can leverage its enormous scale in hardware in mobile devices, but moreso, to have a platform play that includes an OS and potentially richer margins. However, for the smartphone portion of this acquisition to succeed, HP needs to move at warp speed to bolster Palm's position, relationships and products which are heavily under seize by Apple, RIM and others. Innovation and fragmentation in the mobile industry makes the PC market seem tame and HP will need to manage this business differently than the PC business.
IDC believes that HP is getting a top mobile OS that represents one of the best in the industry. However, we feel that even with a deep-pocketed parent, Palm still faces formidable headwinds as it attempts to build a presence in the smartphone space. First, Android is gaining share in the market and by 2013, IDC predicts that it will become the number two smartphone OS in the world behind Symbian. Second, despite a few deals with foreign mobile operators, Palm has no presence outside of the U.S. and HP will need to expand its geographical footprint. To do this, HP will need to lean heavily on its suppliers to create BOM that is attractive in growing markets where carriers do not subsidize devices, while building a channel that relies less on carriers and more on independent retailers. (These two tasks play very well to HP?s strengths.)
A key element of the acquisition involves HP?s strategy to own more of the overall system value (and control more elements of the customer experience) across various devices. We believe at the end of the day this deal is about Palm's webOS operating system. While there are only about 2,000 applications supporting webOS, it is considered to be an easy platform for developers to create new applications. Additionally, webOS's similarities with Linux-based PC distributions makes it a much easier transition for PC-focused developers to get into mobile apps ? something that as the leading PC maker HP should be able to capitalize on and galvanize support for. The risk is that Palm has proven unsuccessful in gaining widespread support for the platform amongst developers so far and the competition for those developers from other platforms is rising. HP is betting its market heft will help to shift the momentum in its favor. We believe that with webOS being owned by HP, application developers and carriers will be more likely to support it ? assuming HP is willing to invest deeply in supporting the developer community and in heavily marketing the platform to end users.
Clearly, webOS will cross into multiple mobile device categories and this deal is not just about smartphones. With support for features, such as touchscreen and accelerometer support, WebKit-based browsers like Safari and Chrome, and advanced application support, webOS is well positioned for relatively easy migration to media tablets allowing it to better participate in the rapidly developing tablet device market. In fact, IDC expects worldwide media tablet sales to hit 7.6 million units this year and approach 50 million by the end of 2014. Other connected portable consumer electronics devices are forecast to reach nearly 40 million in 2014. Other devices, like mininotebooks are also likely targets and long term, potentially home electronics, as HP will likely want a robust multiscreen offering.
Strategically speaking, this acquisition could move HP into a higher margin business and we believe that is the company?s $1.2 billion bet. With webOS, HP can access an application and service delivery platform that has loyal and growing support. With proper investment and convincing marketing, this could be a new business model for HP. However, unlike in the PC business, that investment and marketing will not be shared with Microsoft, it will be HP's alone to bear. HP will need to market and advertise on a whole new scale, over a long period of time and this is perhaps the company?s biggest challenge in making the acquisition a success.
This acquisition will stress HP?s relationship with Microsoft but given the company?s scale and likely continued support of Windows 7 mobile, it will not seriously damage it. Also, we view this OS are being more focused on supporting HP?s consumer business and HP?s Windows mobile devices continue to target the enterprise. HP has challenged Microsoft to a blinking contest in the past for the sake of exploring new opportunities (e.g. MIE on mininotebooks and UI for TouchSmart). Historically, HP's software efforts haven't proven successful with mainstream adoption; however, we note that this is a bet for the next decade and beyond and if the company?s OS efforts fail to materialize, it can revert back to its current position, mitigating its risk.
Bottom line: About a one in four chance of success with a 20x payout.