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Buying of Palm and Game/Auction Theory

http://dealbook.nytimes.com/2011/09/30/will-amazon-buy-palm-for-its-patents/

The above article describes Amazon’s consideration of buying Palm from Hewlett-Packard as it looks to further develop its tablet platform. HP bought Palm just a year ago to acquire Palm’s line of Smartphones and its mobile operating system that could compete with Google’s Android and Apple’s iOS. Since then however, the Palm acquisition has only bled money from HP, a company which now is struggling to stay afloat and pick the direction it wants to go in. However, HP may be able to generate some value from Palm by selling it to Amazon who is finally getting serious about its mobile devices. Just last week for example, Amazon released its new Kindle Fire product, a mobile device priced at $199 set to compete indirectly with Apple’s more expensive iPad product. As Amazon continues to target a different market than its competitors while still operating in the mobile device space, analysts believe that Amazon will begin acquiring companies with many patents such as Palm as an intellectual property defense within a very tumultuous industry.

Amazon’s consideration of buying HP’s Palm business applies directly to the idea of game theory described in class. With Amazon as player A and HP as player B, each player has two decisions: to go forward with the decision to buy/sell or not to follow through. In A’s case, going through with the sale of the Palm business allows HP to create value and add to its existing product lines while refusing to go with the sale forces A to continue looking for a suitor and bleed out money. In B’s case, going through with the purchase of the Palm business would add to B’s defensive portfolio of patents and expand its line of mobile devices while refusing would run the risk of B having large holes in its patent defense for the future. Considering all the options, there exists a Nash Equilibrium where A and B both go through with the deal due to the risks associated with patents. If A wants to pursue the deal, B’s best response is to pursue it as well. If B decides to pursue the deal, A’s best response to B is also to go along with the deal. As a result, Nash Equilibrium exists where both players ought to go through with the deal because their livelihood depends on the sale/purchase’s success. This generic situation with both companies agreeing to combine within the technology space is widespread as intellectual property plays a major role in surviving within such a fast paced industry. With giants such as Apple and Microsoft afoot, the risk of not having the proper patent shield has become even greater.

The event of a technology company selling itself off applies to auction theory as well. With so many buyers and sellers in the tech space, companies such as Amazon and HP have incentives to go forth with the deal based on not only their own valuations of Palm, but also the valuation other bidders might have for Palm. In the case of a first-price auction where Amazon ought to shade its bid for Palm in order to receive an upside, bidding more might actually be preferred. Since the tech space is overrun with patent law cases that make or break companies, the control of patents is extremely valuable and it might be even smarter to pay more for a company to prevent another bidder from getting it. For example, Apple gaining control of Palm’s patents might pose a serious threat to Amazon’s mobile device platform that could destroy its business. As a result, this idea strays from the typical pattern of a first-priced auction because bidding more than what one values a company at might be better because of the competitive nature of the industry. Likewise, for a second-price auction where Amazon ought to bid exactly at its value of Palm, it might again make sense to bid more than its valuation of Palm to prevent its interconnected competitors from gaining control of Palm’s patents.

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