HP buys ailing hansdet maker Palm for $1.2bn

Hewlett-Packard, the world's largest computer manufacturer, last night staged a dramatic entry into the mobile phones market, buying ailing handset maker Palm for $1.2bn.

The company said it wanted to use Palm's software across a range of new internet-enabled devices, which may include tablet computers as well as smartphones. "Advances in mobility are offering significant opportunities and HP intends to be a leader in this market," said Todd Bradley, the head of HP's personal systems group.

Palm put itself up for sale earlier this month, calling in Goldman Sachs to handle an auction after a string of profits warnings. The $1.2bn price includes equity and debt.

Palm, founded by the engineer Jeffrey Hawkins in 1992, pioneered handheld personal digital assistants (PDAs) which enabled users to enter notes and calendar items using a pen on a touch screen.

Its most recent reinvention as a manufacturer of smartphones has failed to pay off, however. Squeezed between the consumerist cool of Apple's iPhone and the corporate capabilities of Research in Motion's BlackBerry, neither the well-reviewed Palm Pre nor its successor the Pixi met sales expectations.

The sale is a saving grace for Elevation Partners, the private equity investor in which the U2 frontman Bono is a partner. It spent about $460m accumulating a 30 per cent stake in Palm, cutting its losses to about $160m. HP agreed to pay 23 per cent above Palm's share price at the close of trading yesterday.

Lawrence Harris, an analyst at CL King Associates, said: "The smartphone market continues to grow rapidly and I think it would be at HP's risk to ignore it. This is one segment where HP did not have a major role. Google is here, Apple is here. And there aren't many standalone smartphone companies that can come on the market for sale."

Jon Rubinstein, the Palm chief executive, is expected to stay with the group. He said: "We are thrilled by HP's vote of confidence in Palm's technological leadership, which delivered Palm webOS and iconic products such as the Palm Pre."