HP Redirects Its Mobile Device Business Strategy with the Acquisition

question 102

Essay

HP Redirects Its Mobile Device Business Strategy with the Acquisition of Palm
With global PC market growth slowing, Hewlett-Packard (HP), number one in PC sales worldwide, sought to redirect its business strategy for mobile devices. Historically, the firm has relied on such partners as Microsoft to provide the operating systems for its mobile phones and tablet computer products. However, the strategy seems to have contributed to the firm's declining smartphone sales by limiting its ability to differentiate its products and by delaying new mobile product introductions.
HP has been selling a smartphone version of its iPaq handheld device since 2007, although few consumers even knew HP made such devices, since its products were aimed at business people. Sales of iPaq products fell to $172 million in 2009 from $531 million in 2007 and to less than $100 million (excluding sales of Palm products) in 2010.
With smartphone sales expected to exceed laptop sales in 2012, according to industry consultant IDC, HP felt compelled to move aggressively into the market for handheld mobile devices. The major challenge facing HP is to overcome the substantial lead that Apple, Google, and Research-In-Motion (RIM) have in the smartphone market.
To implement the new business strategy, HP acquired Palm in mid-2010 in a deal valued at $1.4 billion (including warrants and convertible preferred stock). HP acquired Palm at a time when its smartphone sales were sliding, with Palm's share of the U.S. market dropping below 5 percent in 2010. Palm was slow to recognize the importance of applications (apps) designed specifically for smartphones in driving sales. Palm has several hundred apps, while the number for Apple's iPhone and Google's Android are in the tens of thousands.
HP is hoping to leverage Palm's smartphone operating system (webOS) to become a leading competitor in the rapidly growing smartphone market, a market that had been largely pioneered by Palm. HP hopes that webOS will provides an ideal common "platform" to link the firm's mobile devices and create a unique experience for the user of multiple HP mobile devices. The intent is to create an environment where users can get a common look and feel and a common set of services irrespective of the handset they choose.
HP also acquired 452 patents and another 406 applications on file. Palm offers one key potential competitive advantage in that its operating system can run several tasks at once, just as a PC does; however, other smartphones are expected to have this capability in the near future.
By buying Palm, HP signals a "go it alone" strategy in smartphones and tablet computers at the expense of Microsoft. HP is also hoping that by having a proprietary system, they will be able to differentiate their mobile products in a way that Apple and Google have in introducing their proprietary operating systems and distinguishing "look and feel."
Through its sales of computer servers, software, and storage systems, HP has significant connections with telecommunications carriers like Verizon that could help promote devices based on Palm's technology. Also, because of its broad offering of PCs, printers, and other consumer electronics products, HP has leverage over electronics retailers for shelf space.
Discussion Questions
1. To what extent could the acquisition of Palm by HP be viewed as a "make versus buy decision" by HP?
2. How would you characterize the HP strategy for mobility products (cost leadership, differentiation, focus, or a hybrid) and why?
Case Study Short Essay Examination Questions
BofA Acquires Countrywide Financial Corporation
On July 1, 2008, Bank of America Corp (BofA) announced that it had completed its acquisition of mortgage lender Countrywide Financial Corp (Countrywide) for $4 billion, a 70 percent discount from the firm's book value at the end of 2007. Countrywide originates, purchases, and securitizes residential and commercial loans; provides loan closing services, such as appraisals and flood determinations; and performs other residential real estate-related services. This marked another major (but risky) acquisition by Bank of America's chief executive Kenneth Lewis in recent years. BofA's long-term intent has been to become the nation's largest consumer bank, while achieving double-digit earnings growth. The acquisition would help the firm realize that vision and create the second largest U.S. bank. In 2003, BofA paid $48 billion for FleetBoston Financial, which gave it the most branches, customers, and checking deposits of any U.S. bank. In 2005, BofA became the largest credit card issuer when it bought MBNA for $35 billion.
The purchase of the troubled mortgage lender averted the threat of a collapse of a major financial institution because of the U.S. 2007-2008 subprime loan crisis. U.S. regulators were quick to approve the takeover because of the potentially negative implications for U.S. capital markets of a major bank failure. Countrywide had lost $1.2 billion in the third quarter of 2007. Countrywide's exposure to the subprime loan market (i.e., residential loans made to borrowers with poor or nonexistent credit histories) had driven its shares down by almost 80 percent from year-earlier levels. The bank was widely viewed as teetering on the brink of bankruptcy as it lost access to the short-term debt markets, its traditional source of borrowing.
Bank of America deployed 60 analysts to Countrywide's headquarters in Calabasas, California. After four weeks of analyzing Countrywide's legal and financial challenges and modeling how its loan portfolio was likely to perform, BofA offered an all-stock deal valued at $4 billion. The deal valued Countrywide at $7.16 per share, a 7.6 discount to its closing price the day before the announcement. BofA issued 0.18 shares of its stock for each Countrywide share. The deal could have been renegotiated if Countrywide experienced a material change that adversely affected the business between the signing of the agreement of purchase and sale and the closing of the deal. BofA made its initial investment of $2 billion in Countrywide in August 2007, purchasing preferred shares convertible to a 16 percent stake in the company. By the time of the announced acquisition in early January 2008, Countrywide had a $1.3 billon paper loss on the investment.
The acquisition provided an opportunity to buy a market leader at a distressed price. The risks related to the amount of potential loan losses, the length of the U.S. housing slump, and potential lingering liabilities associated with Countrywide's questionable business practices. The purchase made BofA the nation's largest mortgage lender and servicer, consistent with the firm's business strategy, which is to help consumers meet all their financial needs. BofA has been one of the relatively few major banks to be successful in increasing revenue and profit following acquisitions by "cross-selling" its products to the acquired bank's customers. Countrywide's extensive retail distribution network enhances BofA's network of more than 6,100 banking centers throughout the United States. BofA had anticipated almost $700 million in after-tax cost savings in combining the two firms. Almost two-thirds of these savings had been realized by the end of 2010. In mid-2010, BofA agreed to pay $108 million to settle federal charges that Countrywide had incorrectly collected fees from 200,000 borrowers who had been facing foreclosure.
-How did the acquisition of Countrywide fit BofA's business strategy? Be specific.What were the key assumptions implicit the BofA's business strategy? How did the existence of BofA's mission and business strategy help the firm move quickly in acquiring Countrywide?

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Definitions:

Income Statement

An account detailing the financial outcomes such as revenue, costs, and profit of a business for a given period.

Accounting Estimates

Refers to approximations made in the financial statements when a precise value cannot be determined, often used in reporting expenses or valuations.

Income Effect

Describes the impact on consumer demand and consumption patterns resulting from changes in income levels, often related to purchasing power changes.

Changed Estimate

An adjustment made to the book value or depreciation of an asset, based on updated information about its expected useful life or residual value.