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July 6, 2010
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The latest disclosure by the world’s largest computer maker Hewlett-Packard Company (HPQ) confirms that it has completed the acquisition of the smartphone maker Palm Inc. (PALM) for $5.70 per share in cash.
This acquisition is expected to help Hewlett-Packard enter the highly profitable smartphone business, where every other IT company appears to be trying its hand. The smartphone market is valued at $100.0 billion, and Hewlett-Packard is trying to grab a chunk of this profitable business. However, the going will not be easy, since competition is particularly stiff.
As per the latest findings of “Network World", Linux-enabled smartphones, coupled with the success of Google's (GOOG) Android, are expected to constitute 33.0% of the global smartphone market in 2015. The firm is of the opinion that more than 60,000 smartphones on the Android platform are already being shipped per day, which is helping it move ahead of the other Linux mobile platforms.
Industry heavyweights Intel Corporation (INTC), Nokia (NOK) and Samsung recently announced two other new Linux-based operating systems, “bada" and “MeeGo", which are expected to drive the demand for smartphones in the coming years, although Linux smartphones are the most popular of date.
Open platforms apart, there is Apple’s (AAPL) iPhone, Research In Motion’s (RIMM) Blackberry, as well as Nokia’s smartphones.
With Apple eating into its core market through the introduction of the iPad, HP needed a smartphone platform that could enable it to play on Apple’s turf. Moreover, the computing giant has also stated its intentions of introducing slate PCs based on Palm’s webOS platform. This could be challenging since it involves significant development activity surrounding the webOS. However, if successful, it would be an interesting play in the increasingly hot tablet PC arena. HP appears to be playing its cards close to its chest, but we are encouraged by other news (such as the Melodeo acquisition) which clearly indicate the company’s competitive intent.
We are also reminded of Dell Inc.’s (DELL) recent entry into the cell phone market with its proprietary smartphone.
Historically, HP has always benefited from adopting technologies from acquired companies. This acquisition will surely provide an edge to the company in the smartphone segment, but not without tough competition from other large players such as Apple, Research In Motion, Nokia and the Korean giant Samsung. After taking into consideration all these, we are sure that with its technical expertise, greater market presence and substantial financial strength, HP will come out a winner in the long run.
HP expects third quarter revenue to remain in line with the second quarter. The company is through with the acquisition of networking major 3Com and holds the coveted position of the largest PC and server manufacturer. Although we remain positive about the company’s performance going forward given that demand is improving and the company holds a leadership position in the PC segment, we are not very confident about a substantial improvement in the company’s printing business, due to availability of cheaper substitutes.
We maintain our Neutral rating on the stock with a Zacks #3 Rank.
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