Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
In the Palm of HP's Hand
On April 28, 2010, smartphone maker Palm (PALM) agreed to be acquired by Hewlett-Packard (HPQ), one of the largest computer companies in the world, for a total price of $1.2 billion. Palm shareholders are to receive $5.70 in cash for each share of common, for a premium of 23% over the closing price prior to the announcement, although the stock traded as high as $18 in September 2009. The acquisition looks like a real positive for HP, because it allows that company to jump-start its participation in the rapidly growing consumer smartphone market.
The most valuable part of Palm is the advanced webOS operating system, which HP could use to build a line of integrated mobile devices. HP makes a very attractive partner for Palm, because HP has the financial strength and global scale of marketing and distribution necessary to substantially improve Palm’s position in the extremely competitive smartphone market. HP currently offers iPAQ smartphones and PDAs (personal digital assistants) to business customers, but has only a minor market share. It is speculated that HP may resume the development of its tablet device, the HP Slate, by integrating Palm’s webOS operating system into the product. If so, the Slate would compete with the Apple (AAPL) iPad.
Thus begins another chapter in the story of Palm’s corporate history. This latest change was necessitated by disappointing smartphone sales and a disappointing stock price. Palm was founded in 1992 as the developer of the very popular Palm Pilot PDA. The company was subsequently purchased by U.S Robotics in 1995, which was, in turn, acquired by 3Com (COMS) in 1997. Then in 2000, 3Com spun off Palm as a separate company.
Palm should have had a natural advantage to exploit the new smartphone market with its Treo mobile device, but over time the market was dominated by the BlackBerry line of smartphones from Research In Motion (RIMM). Other major contenders include the Apple iPhone and the Motorola (MOT) Droid, which runs Google’s (GOOG) Android operating system, as well as smartphones based on the Microsoft (MSFT) Windows Mobile Platform.
In an attempt to regain some product momentum, Palm recruited the lead developer for the Apple iPod media player to design a new line of smartphones. In June, 2009, Palm started selling its new touch-screen smartphone, the Palm Pre, with a new operating system, webOS. In November, Palm introduced a smaller, cheaper model, the Pixi. The new phones enabled users to send e-mail, surf the Web, stream video, and run multiple applications at the same time. Although Palm added Verizon Wireless, a joint venture of Verizon (VZ) and Vodafone (VOD), to its initial carrier Sprint Nextel (S) in January 2010, consumer adoption of the product line was slower than anticipated. Consequently, marketing and research & development expenditures were increasing faster than revenues, leading to continued operating losses.
During the February quarter, the company shipped 960,000 smartphone units into the distribution channel, but actual sell-through was only 408,000 units, causing an inventory buildup at the wireless carriers. As a result, Palm substantially reduced its revenue guidance for the May quarter to below $150 million, which would be less than half the previous estimates. In view of continuing difficulties with promoting the Palm brand, investors began to question the long-term potential of the company as a stand-alone entity. Shortly thereafter, management hired investment bankers to explore the sale of the company.
Although it is once again a part of a larger entity, the Palm story is far from over. That said, it will be interesting to see if the newest owner can do more with the storied brand than previous owners.