HP shakes up mobile market with Palm acquisition

Hewlett-Packard Co. said today it has agreed to acquire Palm Inc., credited with creating the smart phone, for $1.2 billion.

Hewlett-Packard Co. said Wednesday it has agreed to acquire Palm Inc., credited with creating the smart phone, for $1.2 billion.

Palm earlier this month said it was putting itself up for sale after its new webOS platform failed to gain the traction the company and its investors, Elevation Partners, had hoped. By acquiring Palm, HP fills a key hole in its own product portfolio.

HP said it is acquiring Palm for its webOS platform, pointing to its support for application multitasking, tight device integration with support for gesture-based touch, mobile cloud-based services and its development platform, which is suited to Web developers. HP also pointed to Palm's intellectual property portfolio of 1,650 patents and its bench of engineering talent.

Describing it as a "transformational" deal for HP, Todd Bradley, executive vice president of HP's personal systems group said the company intends to invest more in the Palm platform to extend webOS to new form factors. The company also said it will invest to extend Palm's reach in the developer community.

"We anticipate that with the webOS, we will be able to deploy an integrated platform that will allow HP to own the entire customer experience, to effectively nurture and grow the developer community and to provide a rich valued experience for our customers," Bradley said in a teleconference for investors that was webcast. "With Palm, HP acquires a strong operating system to deliver a unique customer experience."

Though HP picked up the iPaq handheld device portfolio with its $20 billion acquisition of Compaq Computer in 2002, the company never successfully was able to use that franchise to develop a successful smart phone. Bradley did not address the future of the Windows Mobile-based iPaq but said HP remains a key Microsoft partner. He did not say whether HP will also support Microsoft's Windows Phone 7 platform, due out later this year.

By acquiring Palm, HP gains Palm's ties to the major wireless carriers – AT&T, Sprint and Verizon. While sales of Palm's newest devices have been lackluster, analysts have praised the device and the webOS platform.

Indeed, Palm lost its way several years ago following the huge success of Apple's iPhone and Research In Motion's BlackBerry. Its aging PalmOS platform needed to be revamped, and it wasn't until last year that Palm released webOS and the first two devices based on the platform, the Pre and Pixi. Palm's effort to woo developers was not without controversy, as reported.

HP said Palm chairman and CEO Jon Rubenstein will remain with the company. Rubenstein is credited with developing Apple's iPod – the platform that the company would extend to build its successful iPhone and iPad lines.

In two rather ironic twists, HP for several years resold the iPod under its own brand, but the two companies parted ways after three years. Also HP's Bradley was Palm's former CEO before coming to HP five years ago.

While the move could boost Palm, thanks to HP's strong distribution reach, it faces formidable competition from Apple, Research In Motion and devices based on Google's Android platform. Palm webOS also will face competition from devices based on Microsoft's forthcoming Windows Phone 7. HP also recently acquired networking supplier 3Com, which spun off Palm in the late 1990s.

Shareholders of both companies have approved the deal, which is expected to close by July 31.