PALM Palm (MM)

Hewlett-Packard Co. (HPQ) placed a roughly $1 billion bet that it can do more with Palm Inc.'s (PALM) critically lauded but commercially troubled mobile software than the embattled smartphone pioneer could do by itself.

H-P made the bold move into the smartphone world with its agreement to acquire Palm for $5.70 a share in cash, which represents a 23% premium to Wednesday's closing price. Including debt and excluding cash, the deal is valued at $1.2 billion.

Palm has been the subject of takeover speculation for the past several months as its products failed to make a dent with consumers.

Palm shares rose 27% to $5.86 in after-hours trading, above the offer price, suggesting some investors are still holding out for higher bids. H-P, meanwhile, fell 0.7% to $52.93.

In Palm, H-P gets a sophisticated and different mobile operating system in WebOS that the PC maker can use to set itself apart from the dozens of handset makers that have jumped on Google Inc.'s (GOOG) Android bandwagon. It also gets a healthy portfolio of mobile patents and a talented team of developers led by Chief Executive Jon Rubinstein. H-P has a retention program in place to keep much of the engineering talent.

Potentially, H-P could use WebOS on its touchscreen tablets. The latest such effort, the Slate, uses Microsoft Corp.'s (MSFT) Windows 7 operating system and has already suffered some negative buzz. Todd Bradley, executive vice president of the personal systems group, said the software could be extended to netbooks as well.

"It puts H-P back in the game, but [Palm] is still wrought with problems," said Maribel Lopez, an analyst at Lopez Research.

Further illustrating those challenges, Palm cut its fourth-quarter revenue forecast by as much as 40%, well below Wall Street expectations, amid continued slow sales.

H-P also has a relationship with Microsoft to use its Windows Phone operating system on its line of smartphones. Bradley said the company will continue to work with Microsoft as a partner.

H-P CEO Mark Hurd hasn't been shy about striking big deals. In 2008, it purchased EDS for $13.9 billion for its information technology services. In November, it agreed to acquire 3Com for $2.7 billion to augment its networking capabilities.

For Palm, it has been a long spiral downward towards the eventual takeover. Rubinstein breathed new life into the company when he came aboard as an executive chairman tasked to create a new platform for the company. The Palm Pre, which was the first device to use WebOS software, was unveiled more than a year ago to critical acclaim and excitement.

But a launch that coincided too closely with the latest version of the Apple Inc. (AAPL) iPhone and included a weak carrier partner in Sprint Nextel Corp. (S) kept the phone from true blockbuster status. Its launch on Verizon Wireless earlier this year saw tepid response, resulting in the carrier slashing prices of Palm's products. Verizon Wireless is jointly owned by Verizon Communications Inc. (VZ) and Vodafone Group PLC (VOD).

While Palm had placed the iPhone in its targets, it got lapped by other platforms, including phones running on Android and the myriad of Research in Motion Ltd. (RIMM) Blackberrys in the market.

It also lacked the developer support for applications that drove the iPhone's popularity. H-P hopes to remedy that by putting its own resources into fostering development of programs for WebOS devices. Bradley said the company plans to "heavily invest" in the platform.

Palm hired advisers and a number of Asian technology companies, including HTC Corp. (HTCXF, 2498.TW) and Lenovo Group Ltd. (LNVGY, 0992.HK), were reportedly interested in pursuing a deal.

Palm, which helped pioneer the concept of melding PC-features with a mobile phone, will now be responsible for propelling H-P's mobile ambitions. The troubled company will have the benefit of H-P's much wider distribution and stronger brand.

Separately, Palm said it now expects revenue for its fiscal fourth quarter ending in May between $90 million and $100 million. Just last month, Palm had put that same figure at $150 million. At the time, analysts were expecting revenue of $306 million.

H-P expects the deal to close during its fiscal third quarter ending July 31.

-By Roger Cheng, Dow Jones Newswires; 212-416-2153; roger.cheng@dowjones.com

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