"And I'm driving a stolen car
Down on Eldridge Avenue
Each night I wait to get caught
But I never do"
-- From "Stolen Car," by Bruce Springsteen, 1980
Palm (Nasdaq: PALM ) has been furiously searching for a partner in recent weeks, but it sure raised a lot of eyebrows when Hewlett-Packard (NYSE: HPQ ) stepped up to the plate to take a swing at the ailing smartphone designer. Some of my fellow Fools don't like the deal at all -- Tim Beyers wonders why HP wanted to pay so much for a company very recently declared to be worth nothing, and Rich Smith checked his calendar for April Fool's redux.
Well, I thought it was a joke, too -- for the opposite reason. I'm flabbergasted over the incredible value HP is squeezing out of a measly $1.2 billion here.
What are you, crazy?
You see, when you add Palm to HP, you get a heck of a lot more than the sum of the parts -- and here's why.
Palm has plenty of bright engineers and quality products. The Pre wasn't a technical failure on any level, but a stillborn marketing effort. The company shacked up with third-place American cellular network Sprint-Nextel (NYSE: S ) to launch the Pre, and that partner is nearly as strapped for cash as Palm itself.
Desperate times call for desperate measures; neither Palm nor Sprint had much of a choice, but were forced to forge ahead with a Hail Mary of epic proportions -- without the marketing funds to make it work. Imagine what the deep coffers of Verizon (NYSE: VZ ) or AT&T (NYSE: T ) could have done with an exclusive Palm Pre contract if the deck of fate was shuffled differently.
But AT&T was (and still is) busy promoting the Apple (Nasdaq: AAPL ) iPhone. Mighty Verizon surely wanted a more bankable super-smartphone than the entirely unproven new platform from tiny Palm, and hitched its smartphone wagon to the Research In Motion BlackBerry Storm until it could raise an army of Droids with Google (Nasdaq: GOOG ) inside.
So Palm's hand was forced into a less-than-optimal Sprint deal -- and Sprint insisted on exclusive access for a while. None of this is the fault of the Pre, its WebOS operating system, or anything else within the control of Palm's ground troops. A lack of funds became Palm's undoing.
HP has no other date for this dance
As for HP, the everything-technology giant hasn't had a truly mobile computing product for years. Now that the smartphone and tablet markets are heating up to the boiling point, HP desperately wants to stake out a land claim before it's too late.
I used to think that this would happen by way of Google's Android platform with tablets made in-house and phone manufacturing outsourced to someone like HTC or Foxconn/Hon Hai Precision. But picking up Palm on the cheap actually accomplishes the same things a split strategy would: Get the expertise to design and implement a hardware platform, and also a software solution that isn't tied to any of the other giants around Seattle or Silicon Valley.
Meet the new two-headed beast
And we didn't even get to the best part yet: HP has the power to fix what is wrong with Palm today. All of it.
Palm CEO Jon Rubinstein recently complained to Fortune that he would "rather have a spare billion dollars to go spend on brand advertising around the world," but that he had to work around that problem. Sugar daddy HP changes all that. Hewlett-Packard has over $13.5 billion in the bank and generated enough free cash flow last quarter to cover Palm's $1.2 billion price tag. Management has promised to pour cash into Palm's development efforts and marketing. And that, my friends, is the key.
With financial muscle on its side, Palm becomes something much bigger than just another smartphone company saved from the brink of extinction by some random Taiwanese rival; an HP-fueled Palm could drive a harder bargain with Verizon and AT&T, not to mention working up stronger products and a marketing blitzkrieg of a magnitude Palm has never seen before.
HTC would have bought Palm for the pretty bankable American brand name. When HP buys the same company, the brand-new marketing muscle instantly creates a serious smartphone player with the opportunity to take its technology to places the old team never could afford.
There is no doubt in my mind that Palm under HP's wing is worth much more than the $1.2 billion printed on its price tag. This is a brilliant deal for everyone involved, except that Palm shareholders might still be able to cajole a few more pennies per share out of HP. If another sees the merits of Palm’s strong brand and IP assets, a competing bid could tip the price even higher; the stock has traded slightly above the $5.70 purchase price since the deal was announced, after all.
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What will those penny-pinching shareholders bidding Palm past $5.70 get in the end?