By Benjamin Pimentel
After echoing the view that Hewlett-Packard's bid for Palm Inc.
is a smart move with a potentially "sizable" payoff, a Deutsche
Bank analyst said Monday that a closer look shows a far tougher
challenge for the tech giant.
In a report Monday, Chris Whitmore said that the $1.2 billion
merger plan announced last week poses "low risk" for H-P (HPQ), but
Palm would have to post fairly impressive numbers, including
tripling its revenue, for the deal to begin to pay off. Palm is
currently losing money and burning cash as it attempts to boost
sales of its latest smart phones.
"By all measures, this appears to be a Herculean task given the
declining momentum behind webOS among consumers and developers,"
Whitmore said in his note, referring to Palm's well-regarded
operating system.
H-P's Palm bid is widely seen as the world's No. 1 personal
computer company's attempt to expand into the rapidly-growing
smartphone market, an arena Palm (PALM) pioneered.
But it won't be easy, Whitmore said.
"While we do see merit in H-P's strategy to extend webOS beyond
the smartphone market, the investment required to tap this
opportunity may be larger than expected," he wrote.
In a note when the deal was unveiled last week, Whitmore said
the "payoff could be very sizable to H-P, who has the potential to
capture more value in large, rapidly growing markets."
But Whitmore now says that for the deal to have a neutral impact
on H-P earnings per share in the company's fiscal year 2011, Palm's
revenue would have to grow roughly three times to $1.2 billion. Its
gross margin also would have to roughly double to 44%, while
keeping its operating expenses flat at about $500 million.
The problem is Palm's position has steadily weakened in the
smartphone arena.
Whitmore cited data showing Palm with 4% of the smartphone
market share by operating system in the fourth quarter of 2009,
compared with Blackberry, the platform owned by Research In Motion
(RIMM), which has 44% market share. Apple Inc.'s (AAPL) iPhone has
about 24%, while Google Inc.'s (GOOG) Android has 19% and Microsoft
Corp.'s (MSFT) Windows Mobile had 5%.
"Since then, Palm has lost share as it posted severe unit misses
vs. expectation," Whitmore wrote. "HP's primary challenge will be
to re-energize the Palm ecosystem and reverse its declining market
position."
Whitmore estimated the installed base for phones based on the
Palm operating system at about 2.5 million in 2010, compared to the
iPhone installed base of about 85 million.
Other analysts disagreed.
Kaufman Bros. analyst Shaw Wu reaffirmed his view in an e-mail
Monday that the deal is a wise move, "a relatively low risk deal
costing only one month of H-P's cash flow."
In an interview last week, he also said that if the deal works,
"it's a home run and they didn't pay much. If it doesn't work, it's
not the end of the world," he added.
NPD Group analyst Stephen Baker echoed a similar view, noting
that H-P's strengths--including the company's enormous reach in the
consumer and corporate tech markets--could very well turn things
around for Palm in the smartphone arena.
"They're not buying it for what they did last year," he said in
an interview. "They're buying it for what they can do next year.
That's why it's a no-lose situation for H-P."
-Benjamin Pimentel; 415-439-6400; AskNewswires@dowjones.com