HP to buy Palm for $1.2 billion

NEW YORK (CNNMoney.com) -- Hewlett-Packard announced Wednesday that it would buy struggling smart phone maker Palm for $1.2 billion.

HP (HPQ, Fortune 500) -- which is known more for its computers, notebooks and printers than its smart phones -- will buy Palm (PALM) for $5.70 a share in cash, a 23% premium over Palm's closing price of $4.64 on Wednesday. After hours, shares of Palm soared 28%, while shares of HP fell less than 1%.

"Palm's innovative operating system provides an ideal platform to expand HP's mobility strategy and create a unique HP experience spanning multiple mobile connected devices," Todd Bradley, vice president of HP, said in a prepared statement.

On a conference call with analysts, Bradley said HP is looking to increase its market share in the rapidly growing smart phone market. He said the deal represents a "significant opportunity for profitable growth."

"HP and Palm will make a powerful combination," said Bradley. "Palm has a deep bench of engineering talent ... but Palm is operating [at a] loss right now, so we have some work to do."

Palm was the subject of takeover rumors for months, as the company has struggled to sell its Pre and Pixi smart phones. Taiwan's HTC had been a rumored favorite to take over the company, because Palm's patents could possibly have aided HTC in its legal dispute with Apple (AAPL, Fortune 500). But HTC reportedly said last week it was not interested in buying the company.

Palm debuted its Pre smart phone in January 2009 amid great expectations that it might pose the first real challenge to Apple's iPhone. But a bizarre marketing campaign, an exclusive contract with lower-profile wireless carrier Sprint, few apps, and the surprising success of Google's (GOOG, Fortune 500) Android mobile platform overshadowed analysts' praise for the Pre's WebOS operating system.

Sales disappointed, even after the Pre and its smaller sister, the Pixi, came to No. 1 mobile carrier Verizon (VZ, Fortune 500) Wireless. In February, Palm Chief Executive Jon Rubinstein said that 2010 sales would be "well below" its forecasts, and investors responded by cutting the stock's value by half in less than a month.

"We look forward to working with HP to continue to deliver industry-leading mobile experiences to our customers and business partners," Rubinstein said Wednesday in a statement.

HP said it expects Rubinstein to remain with the company and for the deal to close by July.

Buying Palm presents some interesting questions for HP's smart phone line. Most HP smart phones run Microsoft's (MSFT, Fortune 500) Windows Mobile operating system, and the company has committed to launching phones in the fall with the soon-to-be-released and much-hyped Windows Phone 7 OS.

Though the company wouldn't say what its specific plans were in the smart phone market, Bradley said Palm will be a "business unit" of HP, and noted that "Microsoft is a very important partner and will continue to be so."

In addition to smart phones, HP said it plans to "aggressively create a new platform" for Palm's WebOS operating system. HP said it plans to use the operating system in non-smart phone devices, like tablets and perhaps television sets.

"This acquisition combines HP's financial and global strength with Palm's innovative OS and appears to be a winning combination," said James Brehm, analyst with Frost & Sullivan.

Brehm, like most analysts, said he thinks Palm's value is in its WebOS operating system, not in its physical smart phones. Though it's unclear whether HP will choose to license out WebOS to other handset makers, HP will likely opt to sell Palm-branded WebOS phones side-by-side with Windows Phone 7 phones.

HP also noted that the company is interested in Palm's patents. Palm had been making handheld devices for a decade before smart phones came to the market, and analysts say its patents could help a company that buys Palm to fight off any potential legal disputes with other smart phone makers.