Hewlett-Packard announced a $1.2 billion deal to buy Palm, betting it can resuscitate the struggling smartphone maker to compete with the likes of Apple and RIM.   

Analysts say 2010's third-largest US tech acquisition grants Palm's devices global production and distribution reach while launching the world's top PC maker into a tech arena experiencing blistering growth.

The news on Wednesday surprised many on Wall Street, since much of the long-running takeover speculation surrounding Palm had shifted in recent weeks to focus on potential Asian bidders, such as China's Lenovo.

An early pioneer in handheld devices, Palm once dominated the market but has since been surpassed by Apple's iPhone and Research in Motion's BlackBerry. Palm put out a new mobile operating system, the well-reviewed webOS, last year but even that has been overshadowed by Google's Android software.

In a sign of Palm's struggles, the money-losing company headed by Jon Rubinstein -- an ex-Apple executive famous for developing the iPod -- slashed revenue expectations for the current quarter. It said slow product sales have led to low order volumes from carriers.

"If you saw the guidance Palm just put out, it was clear they had to sell," said Phil Cusick, analyst at Macquarie Research. "Given how quickly Palm's business was falling off and how fast their cash was going out the door, they're lucky to get what they got."
Shares of Palm, 30 percent owned by Elevation Partners, jumped 27 percent to $5.88, above HP's $5.70 cash offer. Some investors could be betting on a higher bid, while others could be covering short positions on the heavily shorted stock, analysts said.

HP said the deal for Palm, which both boards have approved, valued the company at $1.2 billion including debt. Based on Palm's latest filing, the deal values Palm's 167.892 million shares outstanding at $957 million.

Analysts said HP has deep pockets to invest in Palm, can expand its carrier relationships and negotiate better component pricing from existing suppliers.

"PC companies don't need cellphone-type margins to make the model work; they can be much more price-aggressive in capturing share and will certainly drive margins down for everyone else," said Avi Cohen at Avian Securities.   

Bank of America Merrill Lynch advised HP, while Goldman Sachs advised Palm.   

HP's foray into the fiercely contested smartphone arena, while it may not immediately threaten Apple, and Research in Motion's BlackBerry, may increase pressure on Nokia, Motorola and other device manufacturers now battling to expand their market share. - Reuters