April 28 (Bloomberg) -- Hewlett-Packard Co. agreed to buy Palm Inc., the money-losing handset maker that was once a Silicon Valley icon, for $1.2 billion to challenge Apple Inc. in the smartphone market.
Palm’s common shareholders will receive $5.70 a share in cash, a 23 percent premium over the closing price, Hewlett-Packard said in a statement today. Elevation Partners LP, Palm’s biggest investor, gets $485 million for its preferred shares and warrants.
The Palm deal moves Hewlett-Packard back into contention with the world’s biggest smartphone makers, including Nokia Oyj, Apple and Research In Motion Ltd. Hewlett-Packard’s current iPaq device hasn’t kept up with competitors. The company also gets a team headed by ex-Apple engineers and a Palm patent lineup that spans mobile hardware, software and power-saving technologies.
“This is a low-price, low-risk way for them to at least attempt to penetrate the smartphone market,” said Brian Alexander, an analyst for Raymond James & Associates Inc. He has a “strong buy” rating on Hewlett-Packard’s stock, which he doesn’t own. “We always wondered why they didn’t have much of a smartphone strategy.”
Palm’s shares, which closed at $4.63 on the Nasdaq Stock Market before the deal was announced, rose as much as $1.32 to $5.95 in extending trading, as some investors speculated another company may make a bid. Possible buyers include Nokia, said Shaw Wu, an analyst at Kaufman Brothers in San Francisco. Nokia spokeswoman Laurie Armstrong declined to comment.
Palm, a pioneer in the market for mobile devices, has a bigger slice of the phone market than Hewlett-Packard. Yet it too has struggled to match the appeal of Apple’s iPhone, RIM’s BlackBerry and phones using Google Inc.’s Android operating system software. Palm’s Pre and Pixi phones, released last year in a comeback bid, didn’t sell as well as expected. Sunnyvale, California-based Palm has reported 11 straight quarterly losses.
“Clearly the market is extremely competitive and a lot of the competitors are very large,” Palm Chief Executive Officer Jon Rubinstein, who will run Palm at Hewlett-Packard, said in an interview. “Palm could have continued on its own, but clearly merging with H-P allows it to get to scale much, much, much faster.”
About a decade after the introduction of the iPaq, Hewlett-Packard is redoubling efforts to win at smartphones, the fastest-growing area of the mobile-phone market. Global smartphone shipments may rise 36 percent to 247 million this year, according to researcher ISuppli Corp. in El Segundo, California.
“H-P has better strategic reach, better marketing abilities and more resources to develop some of the technologies developed by Palm,” said Michael Cuggino, portfolio manager of San Francisco-based Permanent Portfolio Funds, which owns 520,000 shares of Hewlett-Packard.
Elevation, the Menlo-Park, California-based investment firm whose partners include U2’s Bono and Silver Lake co-founder Roger McNamee, first invested in Palm in June 2007, purchasing $325 million in convertible preferred shares. The firm has since invested another $135 million through preferreds, warrants and common shares.
Because of the terms of its investments, Elevation made $25 million, or a 5.4 percent gain, on Palm, while common shareholders lost 65 percent in that period, based on the purchase price. Former Apple finance chief Fred Anderson is also an Elevation partner. He recruited Palm CEO Rubinstein, who at Apple led development of the iPod media player. He went on to build Palm’s current operating system, called WebOS.
The sale marks the end of an era for an innovator in mobile computing. Palm was founded in 1992 by Jeff Hawkins and Donna Dubinsky and was part of 3Com Corp. until 2000. Its devices surged in popularity in the 1990s and early part of the next decade, but in recent years were eclipsed by the iPhone, BlackBerry and Android handsets.
Investors had high expectations for the Pre, unveiled at the Consumer Electronics Show in January 2009. By Sept. 30, the stock had surged almost fivefold to $17.46 from $3.57 before the announcement, only to erase most of the gain in five months.
By March, when Palm said its current-quarter sales would be less than half of Wall Street estimates, some analysts began questioning the company’s viability. There was speculation it may even be forced to seek Chapter 11 bankruptcy protection.
Goldman Sachs Group Inc. and Qatalyst Group are providing financial advice to Palm, and Davis Polk & Wardwell LLP is legal counsel. Bank of America Corp. is Hewlett-Packard’s financial adviser, and Gibson Dunn & Crutcher LLP is giving legal advice.
Palm’s WebOS was a key driver behind the deal, said Todd Bradley, head of Hewlett-Packard’s personal-computer division. Besides pushing “more aggressively” into smartphones, Hewlett-Packard plans to use the software in other mobile devices including tablet computers, though Bradley declined to say when. Hewlett-Packard is the world’s largest PC maker.
“Our focus as we looked at Palm was to further enhance our smartphone position,” Bradley said in an interview. “We looked to acquire them for the WebOS, their broad patent portfolio and broadly deploy devices around the WebOS.”
Palm will become a business unit for Palo Alto, California-based Hewlett-Packard. Today’s acquisition, expected to close by the end of July, also will reunite Palm with networking gear maker 3Com, which Hewlett-Packard purchased this month.
“This solidifies the portfolio of products they can offer an enterprise,” said Bill Kreher, an analyst at Edward Jones & Co. in St. Louis. He recommends buying Hewlett-Packard’s shares, which he doesn’t own. “You are combining the exciting technology from Palm and the scale and distribution capabilities of H-P.”
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