Beyond Horizon

I wanted to look at HP-Palm deal more closely since last few days but never got to get around that. Today I managed to sneak in few hours to do just that.

As most of you would know, HP acquired Palm and accompanying webOS for $1.2 Billion in cash. HP has agreed to pay $5.7 for every Palm stock in cash. Palm was trading at $4.63 before announcement and after announcement it jumped to $5.88. HP stocks dipped to $52.93.

What signals HP’s management gave about the deal?

HP paid $5.7 for every Palm stock and obviously the price has value of synergies embedded in it. In my opinion, HP’s management has fair amount of confidence in realizing the synergies from the deal. Why am I saying so? The reason is HP paid in cash for the deal. If HP did not have enough confidence in realizing synergies embedded in price, it would have pushed for a stock transaction to part risk with acquired company. In all cash deal, HP is bearing entire risk of realizing synergies, and it would do so only if it has confidence in the deal.

Another reason for HP to go for all cash deal could be that it believes its stocks to be undervalued. A company would avoid stock trade-off and rather prefer all cash deal if it believes its stocks to be undervalued (it will have to exchange more stocks for the same acquisition price with undervalued stocks).

To sum it up, it appears that HP’s management has high confidence in the deal and expects to realize synergies from the deal leading to higher stock valuations in future.

 What market is thinking about the deal?

Here is stock movement of Palm over last few days that I pulled out from google:

Palm was trading at just above $4.5 on Wednesday and opened at around $5.8 next day. A ~26% jump. Market rewarded Palm for the deal.

Here is the similar chart for HP:

HP was around $42.5 and fell to $41.5 next day and it’s just above $40 today. Market punished HP.

So it appears that analysts are not in synch with HP’s management about the deal. It has been general trend that stocks of acquiring company falls after the acquisition announcement and this case has been no different. No denying there is a strategic fit between HP and Palm but this marriage, like all other marriages, will have to stand test of time. 

IBM launched two versions of laser printer – Laser Printer E and Laser Printer. Laser Printer E was slower version and it was priced lower than regular Laser Printer. Interesting bit is - Laser Printer E had exactly same pieces of hardware as Laser Printer plus an additional chip to slow it down. So net-net, Laser Printer E was costlier to produce and sold at lower price than Laser Printer. Why IBM did what it did? Well, IBM wanted to target price insensitive customers by segregating them using two versions of printers.

I came across a slightly different version of price targeting few days back. While doing routine grocery, I noticed that 200 ml pack of minute maid costs Rs 20 in Bangalore while the same pack costs Rs 15 in Ahmedabad. A part of difference could be attributed to taxes, but 33% higher price only due to taxes seems unlikely. I wonder if minute-maid thinks that Bangalore customers are price insensitive.