HP buys Palm, but why?

Earlier today, HP announced that it will acquire Palm for $1.2 billion, a 23% premium over Palm's market value prior to the announcement. HP has more than enough cash on hand to complete the transaction without issuing more stock. The question is, why did HP buy Palm? What value do they see in the company, and what does this mean for the future of Palm's products?

Many people don't realize that HP has sold smartphones for some time under the iPaq label, but the company has miniscule market share. Growth in most of HP's businesses has been slowing; it needs to get into new markets, but it was getting no traction in smartphones by itself. By buying Palm, HP gets an existing line of smartphones sold through all the major U.S. mobile operators, along with some international distribution. The distribution agreements might actually be more important to HP than the existing Palm hardware line itself.

HP has said that it will increase Palm's R&D investment, and that it plans to port Palm's WebOS operating system to more devices. However, I wouldn't be at all surprised to see Palm go back to its previous strategy of offering phones with more than one operating system, when it sold different models that ran Palm OS and Windows Mobile. We could easily see Palm phones that run Android and Windows Phone 7 alongside WebOS-compatible models. This would make the Palm product line more appealing to mobile operators.

Will we see tablets running WebOS? Perhaps, but I wouldn't count on it in the near future. A lot of development work will have to be done to make WebOS work well on tablets, in the same way that Apple had to significantly rethink its iPhone OS to make it work well on the iPad.

Finally, will HP's acquisition of Palm make a big difference in the number of applications available for WebOS? Developer interest will be driven by sales of Palm's phones, not the acquisition of Palm by HP. If Palm's market share increases significantly, more developers will write for the platform, but the acquisition isn't going to open the app floodgates by itself.