HP pins smartphone future on ailing Palm brand

Hewlett-Packard Co. Chief Executive Officer Mark Hurd may find his company’s latest foray into wireless phones is no easier than its failed first effort.

In a $1.2 billion deal, Hewlett-Packard yesterday said it would buy Palm Inc., maker of the Pre and Pixi phones. Hurd plans to tap Hewlett-Packard’s sales force, marketing muscle and knack for securing components at low prices to revive Palm.

Hewlett-Packard has made little headway in smartphones with its iPaq personal digital assistant. Palm may not do much to help its new owner win over customers loyal to Apple Inc.’s iPhone and the Research In Motion Ltd. BlackBerry.

“Just because H-P now has a smartphone in its lineup doesn’t mean people are going to wake up tomorrow and say, ‘Aha, this is the next Apple,’” David Garrity, principal at GVA Research LLC in New York, said on Bloomberg Television. “There are obviously a lot of things Apple has in terms of its iTunes store and apps that H-P doesn’t have.”

Palm’s shares rose $1.21, or 26 percent, to $5.84 at 4 p.m. New York time on the Nasdaq Stock Market, as some investors speculated another company may make a bid. Hewlett-Packard fell 40 cents to $52.88.

Hurd, who took over as CEO in 2005, is using acquisitions to broaden in businesses that generate higher profits than Hewlett-Packard’s personal computers and printers. Hurd, 53, this month completed the purchase of 3Com Corp. to step up competition with Cisco Systems Inc. in networking equipment.

Growing market

Smartphones, the fastest-growing segment of the mobile phone market, are also alluring. Worldwide smartphone shipments are set to rise to 247 million units in 2010, up 36 percent from 182 million in 2009, according to ISuppli Corp.

Hewlett-Packard, based in Palo Alto, California, began marketing the iPaq after buying Compaq in 2002. Yet the devices have failed to resonate with consumers.

Last year, the iPaq accounted for 0.1 percent of the smartphone market, according to researcher IDC in Framingham, Massachusetts. At Hewlett-Packard’s handheld business, which includes smartphones and personal digital assistants, sales fell 56 percent to $25 million in the quarter that ended Jan. 31.

Palm, based in Sunnyvale, California, has made deeper inroads. Its devices surged in popularity in the 1990s and early part of the next decade, though in recent years were eclipsed by the iPhone, the BlackBerry and phones sporting Google Inc.’s Android operating system.

Losing share

By March, when Palm said its current-quarter sales would be less than half of Wall Street estimates, some analysts began questioning the company’s viability. There was speculation it may even be forced to seek Chapter 11 bankruptcy protection.

Palm’s share of the U.S. smartphone market fell to 5.4 percent in February from 9.4 percent a year earlier, according to ComScore Inc. With 42.1 percent, RIM had the largest share.

Hewlett-Packard plans to boost Palm’s annual $190 million research and development budget while spending more on sales and marketing of Palm products. The computer maker has $13 billion in cash and a 24,000-person sales force.

To succeed, Hewlett-Packard will have to attract new customers as well as software developers who can build games, tools and applications that make Palm smartphones more alluring. Many programmers are already busy creating apps for Apple, Android and RIM, said Alex Liu, a partner at A.T. Kearney, a management consulting firm. There were more than 185,000 apps for the iPhone earlier this month.

Better together

Still, Palm and Hewlett-Packard may do better together than they did separately, Liu said. Hewlett-Packard had resources and the wrong product, while Palm lacked financial backing, he said.

“It’s two wrongs trying to make a right,” said Liu, who’s based in San Francisco. “They both under-delivered.”

Palm put itself up for sale, people familiar with the matter said earlier this month, after a partnership in January to sell phones through Verizon Wireless failed to boost growth as much as analysts estimated. Taiwan’s HTC Corp. and China’s Lenovo Group Ltd. looked at the company, people familiar with the matter said at the time. Dell Inc. also looked at Palm and decided against making an offer, the people said.

Analysts including Kaufman Bros.’s Shaw Wu have also named Nokia Oyj, the world’s largest mobile-phone maker, as a potential bidder. Nokia isn’t planning to compete for Palm, according to a person with knowledge of the company’s plans. Nokia spokeswoman Laurie Armstrong declined to comment.

If the acquisition by Hewlett-Packard falls through, Palm may be required to pay it $33 million, according to a regulatory filing from the computer maker.

‘Much-needed marketing’

Buying Palm is likely to save Hewlett-Packard money trying to develop an operating system and will shorten how long it takes to bring new phones to market, said Jack Gold, founder of J.Gold Associates, an information-technology firm. Hewlett- Packard’s current lineup of iPaq phones run Microsoft Corp.’s Windows Mobile operating system.

“H-P’s Windows Mobile phone business is dying a rapid death and H-P would have had to totally revamp its product line in order to stay in the smartphone business,” said Gold, who’s based in Northborough, Massachusetts. Palm has “a compelling OS, but their marketing has been weak. H-P has a great ability to fund the much needed marketing Palm needs to get noticed.”

Hewlett-Packard relied on its retail connections and mobile-computer designs to grab the largest share of the PC market in 2006. The company’s tens of thousands of retailers put its products in front of more consumers -- giving it an edge over former leader Dell Inc., which mostly sold computers online and through catalogs.

When lower-cost laptops called netbooks became the fastest segment of PC market during the recession, Hewlett-Packard was able to use its scale to match the prices of competitors, offering models for as little as $299.

“H-P has this tremendous scale and this tremendous capability,” Palm Chief Executive Jon Rubinstein said in an interview. “They’re the largest technology company in world.” Rubinstein will continue to run Palm within the Hewlett-Packard fold.

--With assistance from Connie Guglielmo, Ian King and Ari Levy in San Francisco and Diana ben-Aaron in Helsinki. Editors: Tom Giles, Stephen West

To contact the reporters on this story: Joseph Galante in San Francisco at [email protected]; Rochelle Garner in San Francisco at [email protected]

To contact the editor responsible for this story: Tom Giles [email protected]

Bloomberg Businessweek