Palm's Fortunes: Cloudy Again

After rumors of a Motorola buyout faded, investors were left wondering what the future holds for the Treo maker

by Arik Hesseldahl

It was all supposed to be decided this week. Palm, the storied Silicon Valley company made famous in the mid-1990s for its innovative line of personal digital assistants starting with the PalmPilot, and leading up to the current Treo line of wireless smartphones, would become part of Motorola.

At least, that is what the market appeared to have decided by Mar. 21, as media reports spread—the most notable of which appeared on CNBC—citing an anonymous Motorola (MOT) shareholder saying a deal appeared as certain as a windy day in March at the company's headquarters outside Chicago. Investors bid Palm (PALM) up by $2.51 over the course of six trading sessions, culminating in a Mar. 21 close at $19.45.

One day later, investors sent the stock sliding nearly 9%, or $1.71, once it became clear that Motorola is in no condition to do a high-profile acquisition that could cost between $2 billion and $3 billion. Sources close to another rumored acquirer, Finland's Nokia (NOK), dismissed rumors that it was also in the running to acquire Palm.

On Mar. 21, Motorola Chief Executive Ed Zander disclosed that the company now expects first-quarter sales to be in the range of $9.2 billion to $9.3 billion, down more than $1 billion from its January forecast of $10.4 billion to $10.6 billion (see BusinessWeek.com, 3/22/07, "Motorola's Zander: On Razr's Edge").

Unlikely Target

With the prospect of an imminent sale rapidly diminishing, Palm CEO Ed Colligan sounded a defiantly positive note on an earnings conference call with analysts and reporters on Mar. 22. In reporting an $11.8 million profit on sales of $410.5 million, Colligan batted aside questions about the rumors of a sale, saying the management was "focused on operating our standalone company and driving our plan."

Meanwhile, analysts slammed the very idea of a buyout by the likes of Motorola or Nokia as ludicrous on its face: "There is no way a large company would be buying Palm as a strategic play at its current price," says Rob Sanderson of American Technology Research in San Francisco. "It would be easier to beat them up in the marketplace and then buy the operation on the cheap later."

Sanderson also questioned whether Palm would make sense as the target of a private equity buyout—as has also been reported. "I could see this thing having very serious margin declines, and that would make it a very sketchy investment, even with all the private equity action that's going on right now."

Rivals Aplenty

Does Palm need a white knight? Sure, the market is tough, but there's no immediate crisis on the horizon. Palm's results were better than expected on many fronts. Earnings per share came in at 16¢, vs. a consensus estimate of 12¢. Colligan also trumpeted solid sales of handheld devices and smartphones that hit a record 738,000 units for the quarter, a year-over-year improvement of 30% and a 20% improvement over the prior quarter. Additionally, the company has approximately $500 million in cash, which compared with operating expenses of $368.7 million for the latest nine-month period, suggests a year's working capital would avert an immediate crisis if sales of Palm devices were to nosedive inexplicably.

But when you dissect Palm's sales by product, the picture isn't quite as rosy: Of its units sold, 354,000 were Treo smartphones, the company's flagship product, which would place it far behind Research In Motion (RIMM)—the Canadian company that owns Palm's biggest rival, the BlackBerry—which added 950,000 subscribers in its most recent quarter. And while other would-be competitors have sputtered—Motorola's Q phone is one notable example—multiple rivals are gunning for Palm, and the field isn't getting any smaller. Apple's iPhone will be on the market by summer and, if successful, will likely take a bite out of Palm's business.