« »

Friday, April 29, 2011

The Significance of Hewlett Packard's Palm Acquisition

The significance of Hewlett Packard (HPQ) buying Palm, Inc. (PALM) is expected to be its capacity to gain market share in specific areas of Mobile Communications and Technology such as cellular phones and hand held computing devices. Hewlett Packard's acquisition of Palm, Inc. is scheduled to occur on July 31, 2010. The company will then have improved access to a larger and fast growing market with its new Palm assisted horizontally integrated product line.

Palm is a company that's specialty is hand held computing devices be they phones or mini-computing devices. The company d├ębuted in the late 1990's with its first Palm hardware and has since seen its share prices decline from $100's to around $5.76 in April of 2010. Hewlett Packard has taken advantage of  Palm's low share prices to acquire it  for the price of $1.2 billion or $5.70 per share according to an April 28, 2010 HP press release. (2)
A key to Hewlett Packard's acquisition of Palm, Inc. according to HP and Business World.com (2&1), is Palm's mobile operating system named Palm WebOS. This mobile operating system will allow Hewlett Packard to compete with other mobile operating systems such as Symbian,  iPhone, and Linux. The mobile phone market is forecasted to grow into 2014 according to the Chief Analyst of Mobile and Wireless Communications at Frost and Sullivan, a business growth consulting firm. (3) Such being the case, if Hewlett Packard effectively taps into its own access to capital and distribution network, the development of Palm, Inc.'s product could yield sizable revenue.

Some questions that arise out of such an acquisition are  How long will it take for HP to earn what it paid in cost for Palm Inc.,?,  Is the acquisition intended to supplement a decline in HP's existing market? and how much and how capable is HP in increasing its total revenue and net income. The answers to these questions rest in Hewlett Packard's access to financing, its development of the Palm Web OS, and its ability to position itself as a new competitor in the mobile device market. Given HP's experience in the computer hardware industry, its size and its existing know how, this doesn't seem like too much of a leap for HP.

Hewlett Packard is a fairly strong company if existing product market share, financial statements and statistics, and business strategy are any indicator. Hewlett Packard has a current ratio of 1.27, positive profit margin of 6.98% and high return on Equity (ROE) of 19.83% as per May, 2010 Yahoo finance data.(4) Moreover,  according to 1000ventures.com, Hewlett Packard has a division organizational structure allowing critical areas of large the company to be run semi-independently to facilitate focused management, goal setting and benchmark performance.(5) Hewlett Packard is also an old company, that's endurance through multiple business cycles and the dot.com era, points to its strategic success.

The HP acquisition of Palm, Inc. does not seem to be a flippant one as HP is already horizontally integrated in the computer hardware market. It has a product line of printers for which HP is most known, laptops, desktops, calculators,  scanners, and faxes. Hewlett Packard also has a hand-held product line including the HP iPAQ cell phone series. The significance of Hewlett Packard buying Palm, Inc. seems to be one of market share and growth within the parameters of existing horizontal integration and market know how.

Sources:

1. http://www.bworldonline.com/main/content.php?id=10361
2. http://www.hp.com/hpinfo/newsroom/press/2010/100428xa.html
3. http://bit.ly/6dipQk (Frost and Sullivan)
4. http://finance.yahoo.com/q/ks?s=HPQ+Key+Statistics
5. http://www.1000ventures.com/business_guide/organization_flat.html