HP Acquisition: Palms Down

With the full blessing of Wall Street's geniuses, Hewlett-Packard has trumpeted its $1.2 billion acquisition last week of Palm, the wireless handset maker. However, if you sift through the corporate chest thumping, this deal makes no economic or strategic logic. The prediction here is that the maneuver will flop like a beached whale.

The deal underscores what happens when a firm with a large cash horde panics. As the money pile climbed to nearly $14 billion, questions must have arisen about what to do with the stash. The M&A folks were dispatched. The result was a mad grab for an asset that appears cheap only because it has lost so much value. However, even a cursory examination of Palm and the smart phone market should have set off alarm bells.

For instance, Palm has a tiny almost insignificant slice of the booming smart phone market. Palm, which recently introduced its slick Palm Pixi Plus, has a 4 percent smart phone market share, ranked by operating system. Even worse, it is losing share to the Goliaths, Apple and Google, who are relatively newcomers to wireless. Apple's share is 24 percent, while Google's Android comes in at 19 percent. Research in Motion (RIMM), with its Blackberry, occupies first place with a 44 percent market share. As the dwarf of the smart phone litter, how can Palm even hope to compete without massive research and development spending? Did HP sign up for that?

As distressing as those numbers are for Palm, there are even more depressing figures if you own HP stock. By one estimate, Apple's installed base is about 85 million, compared to Palm's puny 2.5 million. While the numbers of smart phone users are growing double digits, Palm is falling further behind. During the most recent quarter, Palm's shipments rose, but its sell-through dipped 29 percent from the previous quarter. Does Palm sound like the right platform to capture this growth market? It makes you wonder if the M&A Department at HP is staffed by Dumb and Dumber.

One reason for the dismal numbers is that Palm was late to the smart phone party, a sad commentary when you consider the revolutionary Pilot and Treo products of years past. Although Palm is trying hard to catch up, the firm is chasing deep-pocketed tech giants, like Apple, RIM, Nokia and Goggle. It is a race they are destined to lose. While every smart phone maker can boast some gee whizz features, the future is all about the applications that run on the unit. Here is where Palm has ceded too much ground, having only opened its app catalog in June of last year. If you are an app developer, does Palm even show up on your radar screen?

But that's not even the worst news. Palm's financials are bleeding red ink, burning through cash as losses mount. In its latest report, Palm posted an operating income loss of $117 million, compared to $102 million for the same period a year ago. Even Palm's CEO and chairman was moved to publicly admit, "Recent performances have been very disappointing, but the potential for Palm remains." Whenever a company uses the "P" word, beware because it usually comes with crappy results.

HP has tried to put a brave face on its decision. Their bigwigs have talked about leveraging their corporate relationships to sell Palm units. That would be great if the decision makers for purchasing wireless units were the same people who bought printers and computers. Unfortunately, they often are not. And even if they were, how will HP dislodge the big wireless carriers who already have extensive inroads and sales into large corporate clients? That begs another question: are Curly, Larry and Moe running the sales and marketing departments at HP?

HP has enjoyed a somewhat checkered past when it comes to acquisitions. Think EDS and Compaq. Past stumbles even led to the sacking of its CEO, Carly Fiorina, in 2005. Before the ink dries on the Palm acquisition, the current CEO might be well advised to start digging into what kind of a severance package HP offers.