Hewlett-Packard (NYSE: HPQ) is the first to take a bite into Palm, Inc. (NASDAQ: PALM).  Shortly after today’s closing bell,  H-P and Palm said they entered into a definitive agreement where HP will acquire Palm at $5.70 per share.  This generates an enterprise value of about $1.2 billion, and the deal has been approved by both of the boards of directors of each.  This merger might not be as simple as many hope.

The deal acceptance does not mean that there will not be a fight here, and this may be just the first negotiating point. Since Palm was spun-out of 3Com Inc. (NASDAQ: COMS), which 3Com acquired, this deal is not shocking.  What is surprising is that Palm’s current chairman and CEO, Jon Rubinstein, is expected to stay with the company — at least for now.

The companies noted, “Palm’s unique webOS will allow HP to take advantage of features such as true multitasking and always up-to-date information sharing across applications.”  The trick is not the O/S… It is making Palm a viable alternative that can compete against Apple Inc. (NASDAQ: AAPL) and Research-in-Motion Ltd. (NASDAQ: RIMM).

Palm stockholders, many of whom are buried in a “long and wrong” trade will not get a chance to have upside in this deal.  The $5.70 is a cash offer.  It is also subject to customary closing conditions, including the receipt of domestic and foreign regulatory approvals and the approval of Palm’s stockholders. The deal is expected to close during HP’s third fiscal quarter ending July 31, 2010.

If this was a stock deal or an offer for holders to choose stock or cash, at least Palm holders could get some potential added upside.  Palm closed at $4.63, but that premium will leave many holders with significant losses.   Its 52-week trading range is $3.65 to $18.09.  H-P has a market cap of roughly $125 billion.

The good news is that this was does not seem to be a deal that leaked. Palm’s $4.63 close was down 0.4% today and the stock did not even trade 10 million shares.

Do not be shocked if Palm traded up even if the forecasts are weak.  There are many potential buyers here, but the question will come down to if anyone is willing to pay up for a company which many feel has very little value.  Shares were halted on the news.

JON C. OGG

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