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How does Hewlett-Packard (NYSE: HPQ  ) justify spending $5.70 per share to acquire Palm (Nasdaq: PALM  ) when the underlying business might be worth zero? Here's how HP executive vice president and former Palm CEO Todd Bradley explained the deal in a statement issued yesterday:

Palm's innovative operating system provides an ideal platform to expand HP's mobility strategy ... And, Palm possesses significant IP assets and has a highly skilled team. The smartphone market is large, profitable and rapidly growing, and companies that can provide an integrated device and experience command a higher share.

So now Palm is on the same level as market heavyweights Apple (Nasdaq: AAPL  ) and Research In Motion (Nasdaq: RIMM  ) ? That's absurd. I'm flabbergasted. Gobsmacked. Discombobulated. And I'm not the only one.

"I just checked my watch to see whether it was running four weeks fast. But nope, it's not April Fool's Day," says my Foolish colleague Rich Smith.

Rich has good reason to be skeptical. He's the Fool who looked under the hood at Palm's earnings engine, and found nothing but busted cylinders and dead sparkplugs. But you don't need to do much math to know this deal is a stinker for HP shareholders, and a TARP-sized bailout for Palm owners.

Empty Palm
Since Rich broke out his calculator in February, Palm has lost market share and twice guided lower on revenue. You don't pay a 23% premium for a company that's bleeding out the way Palm is. Unless you're Todd Bradley.

It's almost funny to watch. Five years ago, Bradley left palmOne -- today's Palm was two separate companies back then -- after some carriers said there would be delays in rolling out the company's newest smartphone, the Treo 650. Bradley was the third executive in a month to resign from palmOne.

Fast-forward to today: Verizon (NYSE: VZ  ) and Sprint Nextel (NYSE: S  ) aren't ordering enough of Palm's Pre and Pixi handhelds. In an 8-K filed yesterday, Palm updated its fourth-quarter revenue guidance once more, to between $90 million and $100 million, down another 33% from the $150 million it predicted five weeks ago.

Oh, and did I mention that Palm's head of webOS development -- the "ideal platform" Bradley touts above -- is also leaving? Palm is like a record that's never left the turntable; it's just spinning, and spinning, and spinning. HP will be the new deejay.

The PC maker won't be paid much for its efforts. According comments made during yesterday's Q&A with analysts, Palm won't add to HP's earnings till after fiscal 2011.

Greasy palms
I don't get it. Today's Palm isn't in any better shape than palmOne was when Bradley set sail for calmer waters. How could he let HP pay so much for so little?

Maybe Bradley wasn't privy to the negotiations (unlikely). Maybe higher ups got a nice song-and-dance from Bono, the U2 singer who is an investor in Palm through Elevation Partners (more likely). In June of 2007, Bono's firm invested $325 million in exchange for a 25% stake in Palm, and then pledged another $100 million the following winter.

You'd think that with the beating that Palm's shares have taken in the years since, Elevation would be exiting its stake licking its wounds. Far from it: According to reporting by The New York Times, Elevation gets $485 million, a modest return on the estimated $460 million it invested.

For the record, yesterday I asked a Palm spokesperson for clarity on how Elevation would be cashed out. The promised answer hasn't arrived yet. Color me shocked.

A wallflower at the developers' ball
Finally, and most troublingly, developers just don't love webOS they way they love iPhone OS and Android. You'll find just three pages of webOS apps at this directory. While not officially reported, the total number of webOS apps is likely in the low thousands. By contrast, Apple has more than 200,000 iPhone apps available via iTunes. Android now boasts more than 50,000 apps.

Bradley says HP is buying Palm so that it can use webOS as a pervasive platform not only for smartphones, but also for tablets and other mobile devices. That's a nice idea, but it'll require HP to court and win developers to webOS, and HP has no history of getting coders to love its stuff. Apple doesn't have that problem. Neither does Google (Nasdaq: GOOG  ) . Both have to lose something in order for HP to win with this deal. I'm skeptical that they will.

On balance, I've got no issue with HP buying Palm. The company needed a suitor, and now it has one. My beef is with the price HP is willing to pay. Palm isn't worth $1.2 billion. Bradley, of all people, should know this better than most.

What would you be willing to pay for Palm? Discuss in the comments box below.

Apple is a Motley Fool Stock Advisor selection. Sprint Nextel is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He had stock and options positions in Apple and a stock position in Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy is racing to the finish line.

Read/Post Comments (28) | Recommend This Article (46)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 29, 2010, at 11:50 AM, kramsigenak wrote:

    Amen... this just dilutes an already diluted smart-phone market... Apple will continue to gain market share, and this will probably help!

  • Report this Comment On April 29, 2010, at 12:04 PM, TMFBent wrote:

    No ego involved in this decision at all, I'm sure.

  • Report this Comment On April 29, 2010, at 12:18 PM, gslusher wrote:

    Another factor: how long will it take to integrate Palm into HP? What happens in the meantime, with uncertainty about possible layoffs at Palm, for example? Who's in charge and can make decisions? The current Palm management probably wouldn't want to make major decisions without consulting HP, which, IF legal, would slow things down a lot.

    In the meantime, Apple will release iPhone OS 4 soon and, apparently, has a new iPhone in the offing. RIM has announced a new OS for Blackberries. These developments would put Palm further behind. It reminds me of the old adage, "The faster I go, the behinder I get."

  • Report this Comment On April 29, 2010, at 12:45 PM, dargus wrote:

    Does Bradley still own any Palm stock?

  • Report this Comment On April 29, 2010, at 12:48 PM, marv08 wrote:

    Palm had six problems: 1. Lousy timing, 2. Mediocre hardware, 3. No money, 4. No developers, 5. Lousy marketing and 6. No ecosystem.

    Out of these 6 problems, HP can solve the "No money" issue. HP has never been good about software, they have no experience dealing with developers and their end user hardware is commodity junk (I leave printers and servers out of the picture here, as they are not really relevant in this context). They have no content and no ecosystem and building this up takes years.

    HP is very strong in the corporate sector, but WebOS is an end-user OS, it has no enterprise features worth mentioning (far behind RIMM and AAPL and MSFT and barely head to head with Android) and HP is not a "boutique" brand attracting the sophisticated audience with money either.

    We won't hear much from this...

  • Report this Comment On April 29, 2010, at 12:48 PM, golffoolx wrote:

    This appears to be a very lazy analysis. Reviews of WebOS were very strong but Palm did not have the horspower to market it (Apple/Google) - HP does. It's the potential of the product that HP is paying for and will ultimately determine if this was a visionary strategic move or the worst deal of all time.

  • Report this Comment On April 29, 2010, at 12:50 PM, outoffocus wrote:

    You know what. I shouldn't even be surprised by this purchase. Isn't this the same company who purchase Compaq (Comcrap)? And Compaq computers are just as crappy now as they were when HP bought them.

  • Report this Comment On April 29, 2010, at 12:57 PM, TMFMileHigh wrote:

    Hello golffoolx,

    >>This appears to be a very lazy analysis. Reviews of WebOS were very strong but Palm did not have the horspower to market it (Apple/Google) - HP does.

    I couldn't disagree more. Also, I find it ironic that you're taking the extraordinary cognitive leap to presume that HP knows how to market to developers.

    Let's be clear about what the problem is here. It's *not* that webOS is a flawed operating system -- we know that's not the case for the reasons you cite. The problem is that Palm was late with developer tools for webOS and never built an ecosystem where it was obvious to coders that writing for the Pre meant making $$. That still hasn't changed, and adding HP does nothing to remedy the problem.

    In short: I agree completely with marv08.

    Thanks for writing and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On April 29, 2010, at 12:59 PM, OptionsX wrote:

    HP pays license fees to put Windows on their devices. With WebOS HP avoids the fees. The aquisition is "chump change" for HP. No doubt, HP will recoup it's investment by saving on fees in 12 mos to 18mos. Defend their turf and reliance on competitors. Palm is sitting on a fair amount of cash, net it isn't as bad as it first looked to me

  • Report this Comment On April 29, 2010, at 1:18 PM, golffoolx wrote:

    As I said, time will tell. Simply saying they were late is very short-sighted. At one time you could have said Apple was late since Palm already had the Smart Phone market cornered.

    HP did not just buy software, they bought a team that, until now, did not have the horsepower to win in today's market. You'll be correct if HP just slaps their brand on this product - let's hope that doesn't happen.

    Some day Apple will be displaced - it might be Palm, or it might be someone else.

  • Report this Comment On April 29, 2010, at 1:24 PM, JHBoricuamn wrote:

    WebOS is a consumer OS with no 'enterprise features'? Far behind? Talk about FUD.

    I work as a Systems Engineer and I can tell you the iPhone's ActiveSync implementation is just horrid. We have no issues with WebOS /Android phones and Exchange ActiveSync, its always the iPhones. It's the one reason we don't support the phone in our environment.

    WebOS has a lot of potential, it is far more elegant than Android/iPhone and unlike the iPhone, it can multitask.

    The problem has always been with Palm's execution, not WebOS. Going exclusive with Sprint killed the momentum they had going for the platform.

    There are plenty of useful apps. Who cares about 200k apps when 99% are garbage? I rather have 1000 excellent apps than 1 million useless ones, in ANY platform.

  • Report this Comment On April 29, 2010, at 1:40 PM, marv08 wrote:

    @@JHBoricuamn: Well, I consult for several companies, the largest one has deployed 6,000 iPhones so far. And they do not have any problems at all. WebOS offers no hardware encryption, no instant wipe, incomplete support for commercial VPNs and enterprise WLAN security standards and offers zero deployment tools... No FUD, just facts.

  • Report this Comment On April 29, 2010, at 3:03 PM, sharktrade wrote:

    PALM +25% today, if you are a senior software analyst you know why ... palm is a good tech but bad business, HP want techno not business ...

    related note : you can hack an iphone in ... 20 seconds hunderstand now !

  • Report this Comment On April 29, 2010, at 3:04 PM, kaycee71 wrote:

    Unlike the brainwashed masses that fall for Apple's propaganda, I am glad that there is hope for Palm's future, even if head honchos are moving on. HP & Palm may be on shaky ground at the moment, but the marriage of these 2 will most certainly lead to better consumer products & may finally give the iPhone a swift kick in it's overpriced, overhyped patoot. To me, the iPhone is basically the equivalent of a Ronco all-in-1 potato peeler, diaper steamer, shoe horn & blowtorch; too much stuff & with a gratuitous price tag & shoddy customer service (I flung my iPod into the trash because they have made it all but impossible to get help unless you have the latest versions & I refuse to pay $9.99 for some dork to read from a useless flow chart.) As a user of Palm products for over a decade & an owner of various HP products, I look forward to seeing someone wipe the smug, uppity smile off of Apple's face & offer smartphones that will be compatible with the various popular apps & also have a better customer service base. Change is not always good, but I am a firm believer that in order to make money, one needs to spend it, so HP taking on Palm may help their shareholders much more than some believe. It's most certainly going to help move the technology forward instead of having it monopolized by an overpriced, uncaring company such as Apple.

  • Report this Comment On April 29, 2010, at 3:30 PM, jesterking1 wrote:

    For me too, it, it makes no sense,at the moment forme. But maybe the HP execs know more?

    I want to at a 7. Point to marv08 view

    HP has/had? a strong relation with microsoft. HP is the largest customer of microsoft. And HP market marketed? windows mobile based Ipaq smartphones, as well as the windows based tablet PC's.

    Does HP change their strategy now? Where is the sense in that?

  • Report this Comment On April 29, 2010, at 4:57 PM, CMFStan8331 wrote:

    At first glance it makes no sense to me either. I guess it's conceivable that there's value for HP in WebOS that not readily visible from the outside, but no matter how good the OS may be, it's not going to provide much benefit for HP without a large library of applications. Time will tell...

  • Report this Comment On April 29, 2010, at 6:06 PM, TMFBreakerRob wrote:

    I think this is GREAT! :)

    This impediment for HP (purchase price, additional resources to "transform" Palm, diverted management attention, forgone opportunities to fund the Palm effort, etc) is....for me....a signal to buy more of my favorite HP/Palm competitor.

    Its a wonderful thing when your competition shoots themselves in the foot.... :) I hope they spend on a bundle on this exercise.

  • Report this Comment On April 29, 2010, at 7:08 PM, Speaz wrote:

    Hopefully they will have better future marketing, although becoming one with HP sure won't guarantee that.

    How to alienate almost all potential male buyers? Name your product Palm Pixi

  • Report this Comment On April 29, 2010, at 9:01 PM, Smorgasbord1 wrote:

    HP probably felt they needed to not bet their future on Microsoft. HP got burned on their iPaq running previous versions of MS's mobile OS, and Mobile 7 doesn't look promising enough to really compete with iPhoneOS or Android.

    With WebOS, at least there's a potential for a product that whose OS and hardware work really well together. I won't argue that HP didn't pay too much, however.

    One thing the success of the iPhone has shown is that cell phone consumers don't remain loyal to a brand, they go after the latest and greatest. The top dog in cell phones has gone from from Star-tac to Nokia to Razor to Blackberry to iPhone, changing every few years. It's most certainly not too late for someone to unseat Apple, just as those other top dog phones were themselves unseated. The 2-year carrier contracts that heavily subsidize phones to renew make it easy and cheap to switch, well, every 2 years.

    Apple appears to understand consumer fickleness. In his "Thoughts on Flash" bog entry today, Jobs says that "the most important reason" for denying Flash is that it "is a cross platform development tool." Jobs doesn't want developers to be able to easily write apps that run on iPhones and other platforms. He's using the current dominance of the iPhone to force developers to choose iPhone or everything else. If those great iPhone apps start showing up on Android or WebOS phones (and to some extent, they are), it's just that much easier for consumers to switch to those phones.

    There's also, of course, the tablet market. What if the HP Slate ran WebOS? My guess is HP didn't feel comfortable putting their fate in Microsoft's hands. They could have thrown in with Google, which is what I thought they would have done. Maybe, however, they felt that with Android they'd be competing with HTC and other low-cost vendors. It could be that they wanted to control their own destiny, and this was the fastest way to accomplish that.

  • Report this Comment On April 29, 2010, at 10:08 PM, oblomov7 wrote:

    I disagree with the premise that the underlying business of Palm is worth nothing. Palm is a technologically focused company, and they have quite a few patents that may come in handy. Having worked at technology companies in Silicon Valley, I understand that many companies are able to see that intellectual property is worth something, and may be worth a lot, if it is developed into a product. And frankly, repeating "Palm is worth zero" doesn't make it true.

    As for the quote in the beginning of the article, I didn't get the impression that Palm feels on the same level as Apple. Palm has a smartphone on the market and therefore is in the same industry. That doesn't mean that they should pack up their bags and go home just because they aren't the biggest company in the industry.

    When HP signed a deal to buy Palm, it sends a message that Palm will have enough money to keep going. This may attract developers that previously felt like it wasn't worth the time to develop apps for Palm if they might not be around for much longer.

  • Report this Comment On April 29, 2010, at 10:42 PM, pdonadiofl wrote:

    If it was possible would it be better money spent to license, Android/iPhone for say quarter of the 1.2 billion. And use a current OS that is already being used?

  • Report this Comment On April 30, 2010, at 7:32 AM, plange01 wrote:

    hp is starting to get desperate like google to find some way to keep up with apple and rimm....

  • Report this Comment On April 30, 2010, at 2:01 PM, TheDumbMoney wrote:

    The value of Palm to itself is completely different than the value of Palm's components, namely its software, to HP. This deal allows HP to use Palm's mobile OS on its tablets, which means HP doesn't have to use Wondows 7. For a billion and change HP is free of Microsoft in a huge new market, and has an independent software platform for its own tablet PC. That also increases its leverage against Microsoft generally in the PC market, which may save it additional money. To repeat, I'm pretty sure HP is not interested in running Palm as an independent company; it would not surpise me if Palm is gone as a brand, shortly. Put simply, HP evaluated the cost of developing the necessary software in-house, vs. buying Palm. The fact that this article doesn't even mention the Microsoft connection should be considered a criminal analyst violation; this article is a perfect example of being so focused on the "Palm tree" that you fail to don't the whole tableau..., the tablet forest, as it were. As to whether the deal is great, who knows, but it's certainly more complicated than presented above. As to the apps question, you should at least ask the question WHY the Palm OS has not been popular: 1) is it because of inherent difficulty/negativity/badness/inflexibility? 2) or is it because developers didn't want to invest time and money developing apps for an also-also ran like Palm? I'm guessing that HP did some digging and, rightly or wrongly, concluded that the latter was true, a problem that would rectified once it bought Palm, thereby unlocking additional value in Palm's software. I know that to a large extent I'm echoing Smorgasbord1, whose comment I just read after I'd written most of this darned post. ! :-)

  • Report this Comment On May 01, 2010, at 2:30 AM, ColonelKernel wrote:

    What kind of quack website is! They show less than 2½% of available webOS apps. Definitely not ALL webOS apps. Not even SOME and barely A FEW.

    And what's the point of saying there's only "three pages" of apps? A web page can have as much or as little information on it as you want. I can fit all 200k iPhone apps on a single web page.

    You didn't research this article. You just chose the first example that supported what you already believed.

  • Report this Comment On May 01, 2010, at 4:26 PM, TMFMileHigh wrote:

    Colonel Kernel,

    >>You didn't research this article.

    With due respect, you're cherry picking. You know that the latest reports have Palm at roughly 2,400 apps, less than 5% of Android's inventory.

    Cracking on changes nothing -- it's *still* a relatively small top hits list when compared to what the other platforms show off, and is reflective of the dearth of great apps for webOS.

    >> You just chose the first example that supported what you already believed.

    Either you didin't read the article, or you're just choosing to write nonsense to try and make a point.

    Let's review what I wrote and still stand by:

    * Palm lacks a serious inventory of webOS apps when compared to rivals.

    * HP has no history of courting developers successfully.

    If you want to convince me this deal will work, explain to me how -- short of bribery -- handing Palm a wad of money makes it good at attracting developers to its platform. Nothing else in this acquisition matters.

    Thanks for writing and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On May 04, 2010, at 12:18 PM, stocksavy18 wrote:

    Since no one has mentioned this before from the original article - This author can't even do math! How can we trust his "objective" analysis? The math I'm talking about is about their guidance - "Palm updated its fourth-quarter revenue guidance once more, to between $90 million and $100 million, down another 50% from the $150 million it predicted five weeks ago."

    Any elementary student knows that going from $150 to $100 is a 33% reduction, not a 50% reduction!

    On the positive side, at least if we used his math, we would only need to make 33% after a 50% loss to break even!

  • Report this Comment On May 05, 2010, at 9:38 AM, TMFKris wrote:

    @stocksavy18: Thanks for pointing this out. It's been fixed to the correct 33% figure.

    Kris - TMF copyeditor

  • Report this Comment On May 07, 2010, at 5:19 PM, cassiell wrote:

    Just throwing this out there:

    It's critical what HP did, for one reason:

    Before the merge, when we think of HP, we think of companies like Dell, Acer and Lenovo: those with zero software/OS developing capacity; and more importantly, limited control over future industry and market.

    Look at us now, we are relating and comparing HP to the real players: MS, Apple, Google. With Palm/WebOS/Software developers, HP now has a say in the future market.

    Look at the timing. It's not day 1 since Palm has been in trouble. Yet HP held to its cash until Apple sold 1 mil iPads. WIth the success Apple is experiencing, HP now thinks hooking its nose to MS is dead end. Unlike Dell, HP wants to have some chip to play.

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