Palm's in Play

PDA pioneer Palm Inc. appears to be in play again, with sources saying the likely buyers could be Nokia Corp. (NYSE: NOK) or Motorola Inc. (NYSE: MOT).

Palm shares rose 6 percent in trading yesterday, as the rumor-mongering gathered momentum among the Wall Street set.

Several sources note that such rumors have made the rounds before, but this time they appear to be more serious. (See Palm & Handspring: Will They, Won't They?) They say that Morgan Stanley has been running the deal and that, in addition to Nokia and Motorola, one or more private equity players may be interested.

The company, whose shares have been beaten down among cutthroat competition in the mobile device market, is certainly drawing interest. A major hedge fund, Galleon Group LP , earlier this month reported in a 13-G filing with the SEC that it had snapped up just over 6.3 million shares -- about 6.2 percent of the 102 million outstanding shares -- of Palm stock.

"This is usually a precursor to some kind of M&A-related activity," notes Info-Tech Research Group analyst Carmi Levy.

Other Wall Street sources say the company has been attracting attention from the buyout crowd because of its large cash position ($500 million, or slightly more than $5 per share) and significant cashflows ($120 million in the trailing 12 months, according to Capital IQ ). According to data for the trailing 12 months, Palm was recently trading at an enterprise value/EBITDA ratio of 9, which is low for the industry group. One source expects a deal to be made north of $20 per share.

Executives from wireless firms and others that Unstrung spoke to at this week's 3GSM show agreed that the company has been rumored to be on the block for a while now. (See It's Not Easy Being Palm.)

Levy says Motorola and Nokia have emerged as the front-runners to buy Palm, as both could use the company's technology to patch weak spots in their product portfolios. Motorola could "push itself over the top in the smartphone market" by adding Palm's Treo line to its own offerings, according to Levi. Much of Motorola's less-than-stellar fourth-quarter performance stemmed from the Schaumburg, Ill.-based company's handset division. (See Motorola Profit Falls 48%.)

Motorola also recently bought wireless email technology startup Good Technology, which had worked very closely with Palm on optimizing its software with the Treo phones. (See Motorola Gets Good.)

Nokia, meanwhile, could use the Treo line to give itself a much-needed boost in the North American market, particularly with enterprise customers. This was one of the few blots on the Espoo, Finland-based vendor's fourth-quarter report. The firm simply has not been able to crack the U.S. business market with its E-Series smartphone. The addition of Palm's product line would make Nokia a much more serious competitor to mobile email maven Research In Motion Ltd. (RIM) (Nasdaq: RIMM; Toronto: RIM) in the U.S. (See Nokia's Profits Up 16%.)

Some analysts are more skeptical about Palm's chances of selling itself off to a major manufacturer, especially at its full market value. "I doubt if anyone would be dumb enough to buy Palm for $1.6 billion -- their current market capitalization," notes Todd Kort at Gartner Inc.

This is largely because Palm is now seen as a fading star in the device market. Analysts say that the company hasn't managed to keep pace with rivals like Motorola, Nokia, and RIM in the smartphone category, while the PDA market that it used to dominate has become much less important in the mobile sector.

In an interesting twist, however, one of Palm's founders is said to be working on a product that could help to recapture some of the company's innovative past. Founder Jeff Hawkins is now rumored to be cooking up an interesting new gadget, which may or not be launched with the Palm brand on it, according to Kort. "The only thing Palm might have that could be of any significant value is the rumored product Jeff Hawkins has been developing."

— Dan Jones, Site Editor, Unstrung