Palm and HP

In the week since HP announced that it would acquire Palm for $5.70 per share there has been rampant speculation in the trade media as to what it all means. Long-suffering Palm shareholders have stars in their eyes, and are even holding out hope for a better deal, which is reflected in the persistence of trades above the offer price. Typically the share price for a deal expected to close as-is would hover ~2% below the offer price, or about $5.55, establishing equilibrium between sellers looking for an early exit and arbitrageurs willing to wait for the deal to formally close. A higher price is unlikely since there is no obvious value of Palm's assets to another buyer at a higher price. Which brings us to wonder how it is that HP thinks that Palm is worth $1.2B.

It's no surprise that HP wants into the smart phone market since it is an easy reach from their PC business, which focuses on computing hardware, and was widely expected ever since their largest competitor, Dell, made the move. After all, if consumers are beginning to prefer smart phones and tablets over traditional PCs and netbooks, the manufacturers of those devices must follow the money or lose revenue. Except that where Dell chose Android as the platform for their own devices, HP is opting for webOS and devices which, currently, only run webOS.

It is true, as some commentators have said, that this approach differentiates them from Dell, Apple, HTC, Nokia, Blackberry and other smart phone vendors. Unfortunately they have tied up with the platform most likely to lose. While this is something that many have predicted (including me), it is also apparent in Palm's steep revenue decline, which reflects low interest from consumers, carriers and app developers. HP said that they are serious about webOS and plan to invest further in the platform. They have the resources to stick it out for years if they are truly committed, but will webOS see a turnaround now that HP is behind it?

Success can be measured. Key indicators to watch for in the next quarter are a halt to the decline in unit sales and positive indications of interest from carriers beyond Sprint, and especially the largest carriers in the US and elsewhere. They won't close deals that soon, but if they can't demonstrate real interest then there is reason to doubt. Unfortunately for HP, I very much doubt that consumers and app developers will be impressed by HP's purchase of Palm. Consumers may respond to a new and extensive marketing campaign, which is unlikely to occur until the deal closes later this year. Attracting more app developers will be delayed until there are hard numbers that show webOS device sales are trending upward.

Yet there is still the matter of all those smart phone platforms in the market, among which webOS is the weakest of the bunch. Assuming that HP wants to keep webOS proprietary -- unlike Android, Symbian and some others -- they need to start pushing out new and compelling devices soon. But, again, they can't do this effectively until after the deal closes. It is conceivable that in the interim Palm could license the software to HP so that HP can get to work immediately, although this would be irregular since the deal itself will have to undergo some (routine) regulatory scrutiny and could imperil Palm's ability to attract and respond to better offers. This is a matter of shareholder interest that cannot be easily dismissed.

Apart from webOS, the other major assets in the deal are Palm's patent portfolio and the hardware devices. The devices are probably not worth a great deal in comparison to webOS and the patents since HP will have its own device plans and, besides, devices age rapidly in the market and all smart phones utilize components from pretty much the same suppliers: the vendor pretty much just assembles them, modifies the software to run on the device, and gets the regulator to certify the final product for sale. Look at the bills of materials for iPhone and any Android phone and they are noteworthy for their striking similarity.

The value of Palm's patents is debatable. Since I doubt that HP intends to license any of it to others or to sue other vendors, the patents' value is most likely to be defensive: to negotiate cross-licensing deals and to shield against suits from others. That is not inconsequential since these lawsuits can result is heavy costs and awards, easily running into the hundreds of millions of dollars, each. This implies that even if HP were to dump webOS and go with Android, purchasing Palm might still be justified in their move into the smart phone business.

Getting back to differentiation, I would say that it is not so much webOS itself that provides this to HP but the Palm team that produced the device and its user interface. In comparison, Dell's and Acer's Android devices appear (at least so far) to be pretty generic Android. This is very unlike HTC, Motorola and even Samsung Android phones. The differences is that PC companies do not have the experience with developing custom user experiences, instead relying heavily on Windows. However one chooses to value the Palm team, this does give them a leg up on their traditional competitors. How this will stand them in the broader smart phone market remains to be seen.

After all this rambling, I still find it difficult to come to any conclusion that I find satisfying. HP has a difficult path ahead of it, where success is strongly tied to their unproven ability to nurture webOS into a contender rather than a might-have-been. They will require a healthy dose of luck in addition to flawless execution.