HP’s Smart(phone) Move

The world’s largest computer maker Hewlett-Packard Company (HPQ - Analyst Report) disclosed on Wednesday that it would be taking over the ailing smartphone company Palm Inc. (PALM) for $1.2 billion. This represents a whopping 53.6% premium to its market capitalization at the end of the day.

The acquisition is expected to provide HP a foothold in the smartphone market, strengthening its competitive position versus Dell Inc. (DELL - Analyst Report), which recently entered the market with its proprietary smartphone. HP’s interest in the company could also have something to do with Palm’s indigenous software that can run not only mobile phones but also other types of mobile computing devices. Historically, HP has always benefited from adopting technologies from acquired companies.

The takeover is a windfall for Palm shareholders, since we believe it would be difficult for any company to match HP’s offer. Additionally, the head of HP’s personal systems group, Todd Bradley, stated that HP would spend heavily on research & development and marketing for Palm products in order to help increase sales volumes of Palm’s Pre and Pixi smartphones.

As per the latest industry data published by market research firm Strategy Analytics, Palm’s smartphone market share in the U.S. declined to 4.2% in 2009 from 6.5% in 2008, whereas the share of market leader Research In Motion's (RIMM - Analyst Report) Blackberry smartphone was 47.8%, with Apple’s (AAPL - Analyst Report) flagship product iPhone accounting for another quarter share of the U.S. smartphone market.

On the other hand, HP’s growth story remains intact. As per the figures published by IDC, Hewlett-Packard still rules the computing world, with the largest market share of 19.7% and registering a unit shipment growth of 19.9% in the first quarter of 2010. Taiwanese computer manufacturer Acer and Dell occupied the second and third positions with market shares of 13.6% and 13.3%, respectively.

HP is gradually emerging as a technological giant, with business interests spanning computing, networking, printing and imaging, cloud computing, electronic medical records and now smartphones. This theory is further validated by the recent acquisition of networking giant 3Com Corporation (COMS) in a bid to protect and where possible, take market share from networking major Cisco Systems Inc. (CSCO - Analyst Report).

This acquisition will surely provide an edge to HP in the smartphone segment, but not without tough competition from other large players, such as Apple Inc, Research In Motion, Nokia (NOK - Analyst Report) and the Korean giant Samsung. After taking into consideration the above-mentioned arguments, we are sure that with its technical expertise, greater market presence and substantial financial strength, HP will come out a winner in the long run.

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