History Shows HP's Palm Buy Can Work

If history can help predict the future, then Hewlett-Packard has a good shot at aptly digesting Palm, analysts say.

On Wednesday, HP announced plans to buy the legendary developer of the Palm Pilot, the first successful personal digital assistant, for US$1.2 billion.

HP has done well historically when buying companies in industries in which it already operates. For instance, HP bought 3Com and was able to immediately add breadth and depth to its existing networking portfolio, said Charles King, principal analyst at Pund-IT.

It also purchased EDS, which significantly boosted its services business and put it in competition with market leaders like IBM. That acquisition seems to be going well so far, although time will tell, King said. "It's arguable they overpaid for it, and exactly how long it's going to take to pay off that $14 billion acquisition remains to be seen," he said.

Despite all the turmoil at the time, the Compaq buy is also judged a success by many analysts. "The Compaq acquisition turned out really well," said Frank Gillett, an analyst at Forrester. HP is now number one in terms of PC units shipped worldwide.

HP has not always been successful when buying companies in hopes of entering a new market, however. For instance, a "notable failure" was HP's purchase of Bluestone, Gillett said. HP hoped to get into the software platform business but didn't execute on the acquisition well and ultimately failed, he said.

With the Palm acquisition, HP appears to be hoping to turn around its existing, lagging handset business and gain a foothold in the slate market, still in its infancy.

"I believe that HP has been very frustrated at trying to sell hardware using somebody else's OS and competing on low margins and not having control over the end-user experience," Gillett said. The Palm acquisition has the potential to rejuvenate HP's smartphone business by giving it control over both the hardware and the software of the end product and offering that same kind of control over future slate products, he said.

HP sells an estimated 200,000 Windows Mobile devices annually, said Ken Hyers, an analyst at Technology Business Research. It has unveiled a slate product that runs Windows 7 but on Wednesday said it hopes to use WebOS, Palm's software, on slate computers.

It's unclear how HP's relationship with Microsoft might change after the deal is completed. On Wednesday, HP Vice President Todd Bradley said that Microsoft would continue to be a strategic partner for HP, but it was uncertain whether he meant in the phone business or only the PC business. "Generally speaking, it's bad news for Microsoft," King said. Even if HP continues to build phones and slates running Microsoft operating systems, the WebOS will likely steal some market share from Microsoft.

HP said on Wednesday that it planned to run Palm as a subsidiary, and it has a track record of doing so with previous acquisitions. For instance, HP now owns Snapfish and operates it as a relatively autonomous subsidiary, Gillett said.

It will need to give Palm a bit of autonomy in order to better attract developers, Gillett said. "If they want to cultivate relationships with developers, they don't want it to disappear into HP. It needs to be a separate standalone thing," he said.

The analysts expect that like Snapfish and 3Com, HP will retain the Palm brand. "You don't kill a brand that is as deeply established as Palm is unless the brand is damaged and I don't think it is," King said.

There are still a few unknowns that maybe even HP hasn't worked out yet. "The question is, will they license the Palm OS?" Gillett wonders.

Like any of the acquisitions overseen by HP CEO Mark Hurd, the integration of Palm will likely involve a lot of operational oversight, King said. People in Palm's marketing and sales groups are most likely to lose their jobs, but the engineering talent will likely be highly valued, he said. "If EDS and 3Com are a way to judge this, I believe they will keep the folks on board who understand the product and they'll maintain the brand. If you look back at EDS, 3Com and now Palm, these are all companies that had well-established brands but where the companies themselves had seen better days."

Theo BBC