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Palm acquisition benefits and HP’s EMS universe

Low risk for Hewlett Packard with huge payoff potential. Acquisition catapults HP into mobile devices. Microsoft and Google relations could sour. EMS currently serving HP include Flextronics, Jabil Circuit, Sanmina-SCI, Hon Hai…

HP’s recent acquisition of Palm catapults HP into connected mobile device legitimacy according to reports by investment banks Needham & Co and Deutsche Bank.

Following the recent announcement, Hewlett Packard proclaimed the Company’s intention to invest heavily into Palm’s WebOS and deploy it across HP’s netbook, smartphone and slate product lines. Wall Street seemed to welcome this idea.

HP’s definitive agreement to acquire smartphone provider Palm is an all cash deal valued at $1.2 billion (or $5.70 per share which is a 23% premium to the close).

Palm is roughly a $95 million per quarter business with losses exceeding $100M (cites Deutsche Bank) and requires significant future investment in R&D and marketing to reverse its declining momentum among consumers and developers.

EMS, ODM serving Hewlett Packard
Venture Outsource research reveals current electronics manufacturing services (EMS) and original design manufacturing (ODM) companies serving HP include Flextronics; Jabil Circuit, Sanmina-SCI, Hon Hai (Foxconn), Venture Manufacturing, Quanta, Compal, Wistron and Inventec are each presently involved with manufacturing PCs, computers and storage equipment for HP.

HP outsourced peripherals and consumer devices programs are currently utilizing services provided by Flextronics, Jabil Circuit and Celestica.

When it comes to outsourcing, HP is much like Cisco whereby the Company knows what its doing and it proactively manages its EMS and ODM business relations with granular detail. Whether one of the above companies will gain additional business as a result of the Palm acquisition is yet to be seen.

Flextronics and Hon Hai are natural leaders in the outsourced handset, smartphone space. Hon Hai (through FIH – Foxconn International Holdings, its handset subsidiary) has focused on smartphone programs with some of the firm’s existing and new clients including Acer, Dell, HP, Lenovo, LG, Motorola, and Palm.

Former Palm CEO tapped
The transaction, already approved by both boards, is expected to close during HP’s F3Q ending July 31, 2010.

HP plans to integrate Palm under Todd Bradley, executive vice president, personal systems group.

It is important to remember that Bradley used to be Palm’s CEO, and is well versed in the value of Palm’s WebOS. Needham & Co. states in its report that few are better at lowering costs than Todd.

Needham goes on to mention, in a classic make vs. buy decision, the investment firm believes the major reason for the transaction is the WebOS, which along with the iPhone OS and Android, represents the best mobile operating systems on the market today.

The key will be for HP to retain the development team and for HP to port the OS over to the upcoming slate computers.

Divergence in instant-on, tablet market?
With the elements of instant-on, true multi-tasking, and data sharing across applications, owning a proprietary WebOS enables HP to have a differentiated tablet offering to separate itself from the multitude offering Android as an answer to the iPad. (Read: ‘Apple iPad vs. netbooks, notebooks, smartphones‘)

Combining Palm’s OS with HP’s incomparable channel presence, Needham believes could prove a compelling combination for consumers.

The bank goes on to state while it is not convinced HP can dramatically divert consumers away from Research in Motion’s Blackberry lines or Apple’s iPhone, merely putting Palm through HP’s channel should improve sales.

Deutsche Bank states in its report it doubts HP will close the gap with Apple or Android within 12 to 24 months and that HP risks damaging Microsoft and Google relations.

From a developer, volume and mindshare perspective, Duetsche Bank feels Palm’s webOS significantly lags behind Android and Apple. In addition, the firm views the acquisition as a response to Apple’s growing dominance / strengthening position in consumer mobility.

Risk for HP low, while payoff could be substantial
Deutsche Bank cites the $1.2 billion transaction value for HP represents less than 10% of HP’s current cash balance and only roughly 1% of HP’s market value.

Meanwhile, the payoff could be very sizable to HP which has the potential to capture more value in large, rapidly growing markets (smartphone, slates / tablets…). The bank expects HP to hedge its risk and remain a strategic partner with Microsoft by offering Windows Mobile 7 on its devices, although this relationship may be strained by this deal. HP’s relationship with Google/Android is unclear at this point.

Source: Needham & Co., Deutsche Bank, VentureOutsource.com, April 2010




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