Actual Analysis: NPD's Ross Rubin on the formula for making HP + Palm work

For the record, the connection between Hewlett-Packard and Palm, Inc. was not something most of us saw coming, and which very few reputable observers of this industry bet their reputations on.

In retrospect, one sees now some of the obvious connections we missed then: the fact that Todd Bradley, now chief of HP's Personal Systems Group, was Jon Rubinstein's predecessor as CEO of Palm; the fact that HP's smartphone market share fell last year to below one hundredth of one percent, and yet Bradley was still charged with the task of devising an instant comeback; and the fact that HP's latest iPaq, announced last December (pictured below) bears so little distinction from a BlackBerry Curve, Samsung BlackJack, or Motorola Q that it may as well be called the "Me2."

But waving in front of HP's obvious red flags were several more obvious white ones:

• Since Mark Hurd took over as CEO, the company has dramatically cut costs, with an emphasis on streamlining operations.
• While it's nice to experiment with product categories outside one's typical bailiwick, HP's last go-round -- its 2006 acquisition of high-class custom computer maker VooDoo PC -- resulted in that division's productivity declining to around that of iPaq.
• With margins falling in the one-time-goldmine printer (and printing ink) business, the company's wrestling with a complete makeover of its second most important consumer-facing brand, possibly merging it with the Personal Systems Group (PSG) division that handles PCs.
• HP's growth divisions today are services and enterprise technologies, especially now that it's acquired EDS, and now that it's championing Dell on almost every front.
• Finally, the cash-tight HP is already paying almost $3 billion for 3Com, the network technology pioneer that -- so ironically now -- became Palm's parent company in 1997 through its acquisition of USRobotics, and then spent six years (1999 - 2005) spinning it off into a separate entity, in such a costly venture that 3Com became ripe for a buyout by HP.

So HP buying Palm? Nah. No way.

Anyone listening in yesterday to HP's hastily arranged analysts' call might have gotten the impression that just 24 hours earlier, HP execs would have said exactly the same thing -- even former Palm CEO Bradley. When asked repeatedly how they plan to make this marriage work, Bradley and VP for Investor Relations Jim Burns indicated they may not actually know the answer to that for several months.

Veteran smartphone business observer and NPD Executive Director of Industry Analysis Ross Rubin -- whose insight is not only 20/20 but often 360 degrees as well -- sees some of the coefficients, if not yet the entire formula, for sealing the deal. In an interview with Betanews yesterday, Rubin pointed out the synergies that could make the deal work...provided Palm transforms itself into yet another new kind of brand for an untapped market. Again.

Indeed, last week, Rubin was talking with us about the synergies that could make Lenovo + Palm work. "At least some of the factors that we discussed for Lenovo apply to HP," Rubin told us late yesterday. "So there are all those opportunities to gain entrance into the carrier channel, to beef up what had been a modest smartphone portfolio business, and to gain access to an operating system that can be used on a broader range of devices, including tablets and smartbooks -- which HP has either already launched or shown publicly. So all of that holds true.

"There are some additional synergies between the two companies. Palm is doing quite a bit in terms of cloud backup and cloud services, which of course is an important business for HP. And HP has world-class R&D, global reach, and financial resources. On the conference call, Todd Bradley said that HP will invest heavily, both in the R&D and sales and marketing for Palm."

Usually an acquisition target does not announce a revenue shortfall on the morning that the deal is to be done. Palm did, in a move that by noon led veteran observers to believe that any deal -- with Lenovo, Huawei, Wal-Mart, anyone -- was off the table. Did HP really come up with a miracle solution for Palm in just minutes?

"When you're dealing with companies like HP, there has to be some thought given beyond the current quarter," responded Rubin. "This is certainly an acquisition that is not income positive for HP in the short term."

Bradley and Burns did indicate that HP would have to spend more on R&D in the coming months than Palm is spending today. On Bradley's side, Rubin pointed out, is his experience with just this kind of turnaround: He was credited with picking up the pieces of the otherwise disastrous HP + Compaq buyout, and making that formula work as well. But in so doing, iPaq appeared de-emphasized.

This is where Ross Rubin perceives an opportunity for Palm to actually help out HP rather than the other way around: giving it retail prominence in markets the iPaq could not crack.

"PCs aren't smartphones; on the one hand, they are different channels. HP has developed great expertise in retail distribution," he reminded us. "That may be more important for smartphones and other kinds of devices powered by webOS moving forward, but it's certainly a different channel from the carrier channel. The Palm business gives them complementary distribution at the carriers where they haven't seen a lot of business in the past."

Next: The potential of HP + Palm + Microsoft...