I believe it's called a "loss leader." Sony did this with the PS3 and Microsoft with the XBox. Once people have the hardware, they are locked on that ecosystem and consume the more profitable software.
The problem with your theory is that it assumes that executives at HP had any business sense whatsoever. They don't.
My guess is that Leo thought:
1) Software is more profitable than hardware, so kill hardware (without thinking that hardware is necessary for software to run on)
2) Tablets OSes are as interchangeable as software - you can just install webOS on a Galaxy Tab
3) "I get paid for performance benchmarks. Oh crap, Palm GBU is going to miss those benchmarks, and people are going to ask me tough questions on the earnings call. I'll preempt them by saying I'm going to kill it."
or something along those lines. As everyone has said, even if they were going to kill hardware, there were 10 other ways they could have done this without shooting themselves in the foot. The market cap they lost was 40x the loss on Palm GBU. FORTY TIMES!
If they had just done a $3 billion securities offering, they might have lost some market cap, but at least they could do a massive loss leader push AND still have money leftover.
When people <mess> up this bad, they don't usually salvage themselves with better moves later. I don't think Leo is Mitch Kupchak (sending Shaq packing, but getting Pau for a song).