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Sometimes I hate being right. Today is one of those days, because it looks like I hit the mark on Palm (Nasdaq: PALM ) .
Three weeks ago, I wrote:
Do users think so little of the Pre, an interesting device whose webOS is undeniably good? "Good" apparently isn't good enough. An analyst at Piper Jaffray recently told Barron's that Verizon (NYSE: VZ ) has experienced only "modest" sell-through of Palm's latest Pre and Pixi smartphones.
Fast-forward to last week. Palm executives warned analysts and investors that demand for its smartphones had gone soft, and that earlier revenue projections were too generous. Here's how CEO Jon Rubinstein put it in a letter to employees, courtesy of The Wall Street Journal: "... Our softer than expected performance is due to slower than expected customer adoption of our products, which in turn has prompted our U.S. carrier partners to put additional orders on hold for the time being."
Shares of Palm fell 19% following the announcement. They have yet to recover.
Only a sadist would enjoy watching Palm suffer like this. This isn't fun. If anything, it's sad. Palm has little choice but to sell to an acquirer, and that's bad news for investment firm Elevation Partners.
You might know Elevation for its most famous partner, U2's Bono. In the summer of 2007, the firm committed $325 million to Palm in exchange for a 25% stake in the ailing handheld computing pioneer. By the following winter, the partners would up their investment by another $100 million.
Elevation has since sold some of its preferred stock, but according to Palm's SEC filings, it still holds enough common and preferred shares to account for roughly 30% of the business. That's the sort of ownership stake you hold for several years, selling multibagger gains slowly. Competitive pressure may deny Elevation that opportunity.
Others who bought around the same time as Elevation are struggling with a 33% loss, and that's after accounting for a $9-per-share dividend.
Losses are inevitable in investing. This one is especially painful for long-time holders of Palm shares, because many saw it coming -- especially Mark Nelson. The former Palm investor wrote this in a letter to management in January 2006:
The prospect of Apple (Nasdaq: AAPL ) competing in the smartphone space is a daunting prospect for Palm. But all players in the smartphone space should similarly fear it. Research In Motion (Nasdaq: RIMM ) , Hewlett-Packard (NYSE: HPQ ) , Motorola (NYSE: MOT ) , and others will need to reassess their competitive portfolio and position in light of an entry by Apple into the market. For these companies, an acquisition of Palm makes sense both offensively and defensively.
He was right then, and he's right now. Palm needs a suitor.
Who would buy?
Finances aren't the problem. Just look at Palm's balance sheet. The company may have borrowed $392 million of the $430 million available to it via a credit agreement with JPMorgan Chase (NYSE: JPM ) and Morgan Stanley, but that's peanuts compared to the $590 million in cash and short-term investments Palm has stockpiled.
Palm needs a bailout because it's at a competitive disadvantage. Developers love the iPhone. CIOs and business users love the BlackBerry. And the Android OS is gaining traction. That leaves Palm picking up crumbs.
So if selling is the only good option left for executives, who'd buy? None of my three ideas should surprise you:
Apple: The talent scout
The iPhone inventor has at times acquired companies for talent, as seems to be the case with Lala.com. Palm has plenty of plenty of brainpower. Current CEO Jon Rubinstein once led the development of the iPod. The Palm-Apple connection is strong enough that Apple Chief Operating Officer Tim Cook tacitly accused Palm of copying the iPhone in creating the Pre smartphone. If it's that good, why not buy it?
Google: The robot repairman
Android's problem is that different versions of the OS have made their way to different handsets, creating application incompatibilities. That frustrates developers. Coders are the new kingmakers when it comes to smartphones. Google needs to give them a reason to fall in love with its robot again. Developers already like Palm's webOS, which, like Android, uses the WebKit rendering engine. There's enough commonality here to make integrating the two worthwhile.
Research In Motion: The scrap shopper
RIM doesn't look like it needs help, but it does. Market-share data from comScore shows the BlackBerry maker led all others with a 41.6% share of the U.S. smartphone market in the fourth quarter. Unfortunately, Research In Motion isn't attracting app developers. Retooling around webOS could change that. The timing also works: RIM Co-CEO Mike Lazaridis recently announced his company's intent to introduce a WebKit-based browser for the BlackBerry.
Always bet on Apple
I didn't include Dell and Nokia in this list, because neither strikes me as having a compelling reason to buy Palm. Rumors of Dell sniffing for a deal seem ridiculous, and Nokia is far too committed to its Symbian OS.
Apple, on other hand, has several good reasons to go after Palm. It's the most natural fit talentwise; webOS is based on the Mac maker's WebKit tools; and CEO Steve Jobs has expressed a mild interest in deals even as he's eschewed dividends. He'd need little of his company's $40 billion war chest to acquire Palm.
And if he doesn't, someone else will. It's long past time to put Palm in new hands
Who should buy Palm, and how much should they pay? Share your thoughts using the comment box below.