Drive Palm Like You Stole It, HP (Because You Did)

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"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.

Fool contributor Anders Bylund owns shares in Google, but he holds no other position in any of the companies discussed here. National Poetry Month ends today -- please bow your head for a moment of silence. Eleven months is a very long time. Sprint Nextel is a Motley Fool Inside Value selection. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

Read/Post Comments (8) | Recommend This Article (6)

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 30, 2010, at 2:34 PM, akutach wrote:

    I'm not seeing it. If Apple, Google, and RIMM were dropping the ball on pushing out innovative products (like Palm did before them) at a time when the the smart phone consumer field was fertile ground for branding or growth, I'd say this might work. That's not the case.

    This is two companies that bring undifferentiated and uncool products to market. In computer sales that works by selling big contracts to big employers with relatively low margins. For smart phones that won't work. Tablets? We'll see. Is there a lower cost, no-frills tablet market out there? Could HP make one by headhunting some Palm employees for less than $1.2B and no liabilities? More likely.

  • Report this Comment On April 30, 2010, at 3:37 PM, baldheadeddork wrote:

    I'm skeptical, too. I don't think the deal is as bad as Tim put it, but Palm's tech successes in the last decade are the Pre and...what? Also remember HP's less-than-golden record on growing acquisitions. This may not be a match made in hell, but it's a long way from heaven.

    This deal might have been great two years ago, but I think that Google's open-source Android platform has such inherit advantages that no one can get in now, and established players like Apple and RIMM are going to be under a huge amount of pressure in the coming two or three years.

  • Report this Comment On April 30, 2010, at 3:40 PM, marv08 wrote:

    "Palm has plenty of ... quality products"

    They have two products, basically being over 12 months old and underpowered. The Pre (Plus) still has a pretty high failure/return rate and the Pixi is a dog.

    "HP has the power to fix what is wrong with Palm today. All of it."

    HP has good mobile hardware? HP has developers, developers, developers? HP has good contacts with the telcos (when have you seen an iPaq anywhere)? HP is hip?

    Sorry, I do not see it either. Palm engineers and HP engineers are two different worlds. They are late to the game already and it might well be 8-12 months before we see the first new device. They may surprise me, but chances are dim.

  • Report this Comment On April 30, 2010, at 9:04 PM, ewliu88 wrote:

    Here's a rebuttal from a Pre Plus owner and stockholder.

    Palm has two functional phones with distinct form factors. The original Pre had some build issues but these were largely corrected with the plus with more reliable sliding mechanism. Iphone has 1 product. BB has essentially 2 different models keyboard or touchscreen despite 100 different flavors that taste the same.

    The processor of the pre and pre plus is same as droid and Iphone 3 gs. So not underpowered but not cutting edge right now. Webos is still being optimized so it's speed and features are improving with major updates. The latest version is significantly faster than original from june 2009 when the Pre first came out on sprint. You know a great feature about webos? You get functional frequent updates so first generation Pre owners get same os as pre plus users. Same with Pixi. I certainly never had great updates adding features on my last Blackberry! And window mobile abandons its users with every major update. The Pixi (plus) is almost free and a lot better than feature phones out there.

    Palm rushed webos and some underpinnings weren't present for more powerful apps to be created. That slowed development and as is obvious now Palm didn't have the perfect execution and scale to compete effectively with the big carriers and attract developers. That COULD change now with the HP purchase of Palm.

    Google's android os is a trap for phone manufacturers. The control lies with google and the phone manufacturer whether motorola or samsung becomes a undifferentiated lackluster device. That's great for a rising 2nd tier company like HTC which doesn't have to create an OS but a major limitation for motorola or samsung,

    Whether my minor investment in Palm does well or not is a BIG question. But I've been very satisfied with Palm as a phone user. Certainly I have much more passion for my Pre plus than my last BB phone. The Webos is the most elegant phone OS out there on the market.

  • Report this Comment On May 01, 2010, at 1:02 AM, ColonelKernel wrote:

    @Anders Bylund

    How is it that you so completely get it when your colleagues so completely don't?

    If money truly is at the heart of most of Palm's misteps, then there are a couple of questions: Why wasn't Elevation Partners investment enough? And how much more will HP have to invest?

    Without Elevation Partners' modest investment, Palm wouldn't have been able to functional at all. HP can pump in several times EP's investment and get the entire machine running smoothly.

  • Report this Comment On May 01, 2010, at 1:32 PM, beetlebug62 wrote:

    "AT&T was (and still is) busy promoting the Apple (Nasdaq: AAPL) iPhone"

    No. AT&T does no promotion for the iPhone, Apple does.

    "hitched its smartphone wagon to the Research In Motion BlackBerry Storm until it could raise an army of Droids with Google"

    You make it sound like this was Verizon's plan. I doubt Verizon planned for the BB Storm to suck as much as it did, and then they decided they needed to promote something else. THAT was the window of opportunity for Palm to sell them the Pre, that they missed. And, being Verizon's partner is exactly the best strategy. When Verizon was promoting BB, BB sales were fantastic; now they are promoting the Motorola Droid, and Moto's sales are fantastic; but soon, they'll be switching their promotion to HTC's Droid, so Moto will be in the dumps, once again. So, wishing to partner with Verizon is a double-edged sword.

    Having tried to correct your errors, now I'll agree with the general gist of your point. Yes, HP is making an interesting play, and the only other potential suitor in the same position would be Dell, who seems to have already passed on the opportunity and gone with Android.

    The key to whether this is a good deal for HP is execution. Can they really create a vertical platfom like Apple? Can they integrate WebOS into a line of products from phones to slates, that plays nice with their PCs, too? I think they have the ability, but it'll take a steady hand on the tiller.

  • Report this Comment On May 01, 2010, at 4:21 PM, jbelkin wrote:

    There are many forces at work here. First, if palm were that strong of a name - they would've gotten a much better reception last year but face it, palm has been resting on its laurels since the 1999 - THEY shoudl have had a true smartphone in the early 2000's but squandered it away. And their launch marketing was LOUSY - what was it with the creepy albino girl who tried to convince us the phone would cahnge lights from red to green? In that situation, you want a brain drain so you don't have to pay severance to the idiotic VP of marketing. You could argue that for $500 million, they prob could've gotten Palm in bankruptcy but at least all the common shareholders didn't get screwed. And palm is virtually unknown in Europe and Asia. can HP get a FULLY OPERATIONAL business unit from webOS and palm? Whether it's phones or phones + slate? how long will taht take - 2 years? Will Apple be using their own 2.5 GHZ chip while Hp is still running on a much slower chip? Then there's the matter of the storefront - does Hp have the means to get that up & running or at least competitive? Most likely Hp overpaid to be the third mobile OS in the US when all is said and done. Maybe that's good enough as Android makes Google no money and has more versions running than Linux but it's by now means a lock and certainly as of now, no competition for Apple. HP bought a car with a decent engine but no transmission and needs serious body work ,...

  • Report this Comment On May 08, 2010, at 11:17 PM, onepremise wrote:

    "HP has the power to fix what is wrong with Palm today. All of it."

    You're joking right? You sound like Cramer from MadMoney. HP has no more R&D left to fix anything. I seriously doubt they will do anything to retain the talent from Palm. They'll probably cut costs until all the talent is too disgruntle to stick around.

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