Kudos to Elevation Partners, the private equity firm who dodged a bullet when they unloaded their 40% share of Palm in HP’s $1.2 billion buyout.  This investment was widely expected to go south, so a 5% return over 2 years, a dud by any other standard, is considered quite the save.  But will HP be able to make a better go of it?

Computing has become increasingly mobile from laptops to smartphones to the up-and-coming tablet computers including Apple’s iPad.  For a computer hardware company to remain relevant it must find its way into people’s palms, pockets, and backpacks or risk becoming irrelevant in an increasingly mobile world.

Now don’t get me wrong.  HP at number 9 on the 2009 Fortune 500 is no slouch and already has a line of iPAQ smartphones and PDAs, as well as its HP Slate tablet computer geared to compete with the iPad.  So why would HP spend $1.2 Billion on a struggling company with products HP already has in it’s lineup?  Here are the pros and cons and the likely outcome:

Pros:

  1. Palm’s legendary brand easily trumps that of the iPAQ in the consumer and wireless space (a benefit to HP, but is it enough to go against Apple, Android, and Blackberry?).
  2. Sexier hardware:  Palm’s Pre and Pixi have received much more consumer attention than HP’s products.  Again, a step up for HP, but the wireless phone space is swamped with sexy handsets that HP will have to compete with.
  3. An established distribution channel and customer base including top wireless carriers around the world (Bell Mobility in Canada).
  4. Hardware and software development teams that HP can use to bolster its current roster.
  5. The acquisition blocks hardware rivals from entering the space and handset makers from consolidating market share.  Acer, Dell, HTC, Lenovo, Nokia and RIM have all been named as potential suitors prior to the acquisition by HP.

Cons:

  1. Although WebOS is a highly regarded operating system, it doesn’t stand a chance against the Blackberry, iPhone, Android and Microsoft-based incumbents.  App developers flock to market share like tweens to Justin Bieber.  Palm’s market share has declined from 15% in 2008 to 5% today, according to ComScore; putting it in last place among the 5 smartphone operating systems.  This anemic market share doesn’t justify broad app development efforts, and in turn, few users will be interested in WebOS-based phones with few apps, which will further erode market share and further stall app development efforts in a vicious cycle.                               The odds are so tilted against WebOS that I’m betting that at some point, HP will scrap it in favour of an agreement to license Android or Blackberry (the latter being highly unlikely now, but possible in the future considering HP’s massive enterprise customer base and iPhone and Android’s threatening growth rates).  This would be a sound move for any hardware company with a history of using 3rd party Operating Systems.  In the tech world, there’s no shame in licensing, and a market-standard OS will at least give HP a fighting chance in the mobile hardware space.
  2. HP is a great hardware company, but doesn’t do consumer electronics well.  Will a weak acquisition really position it to compete head-on with the likes of Apple, RIM, Nokia, Sony Ericsson, Samsung, LG, and other heavyweights?  I think not.  The pros listed above will improve HP’s position, but will hardly give it the firepower to blow powerful incumbents out of the water.

Bottom Line: The Palm acquisition will enable HP to maintain a presence in the mobile smartphone/tablet market space, but a non-standard OS, weak experience with consumer electronics, and very powerful competitors mean that HP won’t be winning any popularity contests and may end up with a $1.2 billion dollar slap in the face.