Pulse Check Update: Palm Reads the Signals

Apr.15.10 | About: Palm, Inc. (PALM)

It was not a good sign for Palm Inc. (PALM) when U2 began to promote RIM’s BlackBerry – especially when you consider that U2’s Bono is a major investor in Palm through Elevation Partners. As noted here previously Palm’s prospects are bleak.

So it comes as no surprise that Palm has hired Goldman Sachs Group Inc. and Frank Quattrone’s Qatalyst Partners to serve as its financial advisor during the process of seeking a buyer. Palm contacted the Chinese telecommunications company Huawei Technologies in mid-February to discuss a transaction, according to Reuters. Huawei, China’s biggest maker of phone equipment, is “open to all the possible opportunities” for North American expansion, said Charlie Chen, a senior vice-president at the company. (Business Week)

IDC analyst Francisco Jeronimo said Huawei and ZTE would be logical bidders. “It makes sense: they don’t have an operating system or a brand, but they have cheap manufacturing costs and money to invest and develop the brand,” he said. “Consumers don’t associate Chinese brands with quality products and don’t pay a premium for such a mobile phone … Palm would be perfect for them.” Kaufman Bros analyst Shaw Wu said Palm is at risk of becoming a “take-under” target, meaning it may fetch “a price that is below its current share price.”

Charles Wolf, a technology analyst at Needham & Co. said Nokia or RIM may be attracted to Palm’s software suite as competition with the iPhone and with Android heats up. “Palm’s software is in the same class as the iPhone and Android” Wolf said (Guardian).

Ross Rubin, a wireless analyst with NPD Group Inc. also suggested RIM as a likely buyer. “From a technical perspective, RIM has exactly the kind of marketshare and momentum that WebOS needs right now,” he said (RCR Wireless ). Morgan Stanley said Nokia and Motorola would gain the most substantial strategic benefit from acquiring Palm. Morgan Stanley analyst Ehud Gelblum said Microsoft, Dell, Samsung Electronics, Lenovo and LG Electronics are all “possible but likely less interested” bidders (Seeking Alpha). Nomura analyst Richard Windsor said HTC Corporation is one obvious buyer that could orchestrate a successful integration. He mentioned RIM, LG, Samsung and Nokia, have all eyed a Palm acquisition but decided against a transaction. (Times Online).

J. Gold Associates analyst Jack Gold differed with this view, asking, “What does Palm bring to the table that HTC doesn’t have?” He said the phone manufacturer “has limited channels [carriers], limited international presence outside of North America, a diminishing customer base, and has lost most of its momentum after it launched the webOS and Pre/Pixi with lukewarm support from its carrier partners and a less-than-successful marketing campaign” (Fierce Wireless).

Frank He, an analyst with BOC International Holdings expects a turnaround firm may be the next step for Palm. He said, “You can do something with it. The share have gone down a lot and the company may become attractive to anyone looking for a turnaround play” (Daily Mail ). CCS Insight analyst Geoff Blaber agrees. “Palm’s limited scale, distribution and weak global brand outside the United States all point to a takeover as the next chapter in the Palm story.”

CL King & Associates analyst Lawrence Harris said Palm had little choice but to consider a sale following the recent disappointing debut of its Verizon phone and upcoming changes to the iPhone and Microsoft’s phones. “Given where we are at, it’s as a good a time as any, because I just don’t see an immediate turnaround,” Harris said (Reuters ).

Om Malik thinks Palm is doomed no matter who buys it and may drag a buyer down with it. Phil Falcone’s Harbinger Capital Partners is betting on a good outcome, taking a 9.43% stake in Palm. “Given that these guys bet on crazy assets for a living, I am sure they have a good reason for making this trade. I may be in the minority for feeling that whoever buys Palm is going to end up just like Palm sooner or later.”

Malik has been down on Palm for more than a year.

Avram J. Davis