Palm Needs a Bailout, Now

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.

Bono, bummed
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.

Apple is a Motley Fool Stock Advisor selection. Google is a Motley Fool Rule Breakers recommendation. Nokia is a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He had stock and options positions in Apple and a stock position in Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy is suited up and ready to play.


Read/Post Comments (14) | Recommend This Article (3)

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  • Report this Comment On March 04, 2010, at 4:49 PM, TheWaterBug wrote:

    Apple will not buy Palm. Steve et al. are not happy with the employee poaching and the alleged IP infringement, and buying them out with a chunk of cash would reward the perpetrators for their disloyalty.

    Note that I'm not siding with Apple, nor do I even believe that Palm's actions are necessarily unethical. I'm just projecting some game theory on the situation, based on what I believe Apple believes.

  • Report this Comment On March 04, 2010, at 5:23 PM, mightymatt24 wrote:

    I don't think Palm will be purchased, but if they are i promise you it will not be apple (who has way too much pride to try to require talent that defected in the first place and probably doesn't want to come back). And I can also guarantee that it won't be google, because integrating these two platforms would be all but impossible. Suggesting that "There's enough commonality here to make integrating the two worthwhile," is absurd. Android has much in common with the blackberry o.s. and almost nothing in common with web os.

    If there is a buyer (which i don't foresee happening simply because elevation partners still believes in this platform, and so do palm employees), I'd look at DELL who has expressed in the recent past that they believe the cell phone is the new personal computer, and subsequently started to develop android phones. I think that dell and hp are the two most logical buyers, simply because they have the resources to push out webos devices at the scale palm needs to be operating.

    Palms 3 main problems are the chicken and egg problem that exists with mass user adoption v.s. mass developer adoption, lack of a desktop sync application and media manager, and lastly advertising. Their strategy needs to be develop a desktop suite or purchase double twist. Get out second generation hardware that addresses speed and battery longevity. And get more overseas adoption. These are all things that dell or hp would be perfectly suited to help them with. Having another cell phone company purchase palm would be unlikely. What assets would palm bring to another cell phone company?

    RIM: Based completely java, and thus incompatible with web os apps. RIM may want to take the user interface metaphors that palm has come up with and integrate them into the blackberry operating system, but why would they need to purchase palm to do that? They can basically take a large portion of the ideas with cards and notifications without so much as a thank you card to palm. Furthermore, integrating rims apps onto webos would be a nightmare (to understate the problem), in that rim devices are dependent on rim bis and bes servers. They would be essentially scrapping all the work they have done on their o.s. to move to a new platform. Which, again, why would they need palm to do this? They have developed their o.s. in house forever, and there are rumors that they are already working on the 6.0 operating system which will supposedly be revolutionary rather than evolutionary.

    Google: Again the android platform is based on a custom implementation of the java virtual machine. Integrating this with web o.s. would essentially be impossible. Google would have to scrap one or the other and integrate the meaningful design elements of the scrapped platform. Again why would they do this? They have already invested too much into android's current state (both in their software, and hardware alliances) to just scrap the whole project. Furthermore, google is confident in their platform, and confident that over time they continue to grow the platform into a dominant force. Google has so much money that they can afford to develop android at a loss nearly infinitely. The fact that they are giving the software away means they will always be able to find hardware partners to work with. Again, they don't need palm.

    Apple: Purchasing palm, would be equivalent to Steve jobs saying "I was wrong." Which will never happen. Steve Jobs would much prefer watching Rubes crash and burn than in integrating palm and making their products better. Most of the talent that palm has are people that left apple because they felt they were being hampered by Steve control. If Apple purchased Palm, what is to say that these employees don't just leave and go work for Google? Also I think that Apple already has all the talent it needs to enable multitasking and make better notifications, however Apple's hubris is causing them to refrain from doing so.

    Dell and HP are the most likely buyers. The only cell phone company that I could see purchasing Palm is Samsung, who seems to desperately want an in house smartphone platform (SEE:BADA).

  • Report this Comment On March 04, 2010, at 7:17 PM, FreeRange1 wrote:

    @mightymatt24 - great post and insight. However, your final comments on Apple are misguided related to multitasking. Multitasking capabilities are already in the iPhone version of OS X and are already being used although on a limited basis. Opening it up is a matter of basically flipping the switch to allow 3 party apps access to the functionality. Something that will happen sooner rather than later as battery technology improves. Probably in the next OS update this summer, at least in a limited fashion. Also, your statement, "Apple's hubris is causing them to refrain from doing so", about Apple acquiring Palm is really unnecessary. The business case is not there as you had already clearly and rightly stated.

  • Report this Comment On March 04, 2010, at 9:30 PM, stts wrote:

    Apple doesn't need PALM. But they would still buy them to keep them out of somebody elses hands. Its alot cheaper now than it was last month. Its like paying somebody to shutup. If its cheap enough, its worth it. But an Apple bid might start a bidding war from others interested but remaining silent. That is what is so dangerous for the shorts piled up on this thing. What if somebody offers a bid that gets public. Any bid thats not insane. Say $4. That means game over for the short plays and they will start to cover. But the shares wont stay at $4 as the shorts scramble to cover. This will be a runaway freight train as a 70% short interest desperately goes wild. And insiders cant sell into all this as they have to follow selling rules to avoid insider trading violations. This will be an AIG monster short cover rally all over again.

    So you see, PALMs stock is heading for a much bigger splash than the company is. That is what investors should be focusing on. And its anybody guess how the crazy price action will affect an eventual PALM buyout.

    As for the company long term, its too soon to be thinking about that. ;)

  • Report this Comment On March 04, 2010, at 9:37 PM, stts wrote:

    Apple doesn't need PALM. But they would still buy them to keep them out of somebody elses hands. Its alot cheaper now than it was last month. Its like paying somebody to shutup. If its cheap enough, its worth it. But an Apple bid might start a bidding war from others interested but remaining silent. That is what is so dangerous for the shorts piled up on this thing. What if somebody offers a bid that gets public. Any bid thats not insane. Say $4. That means game over for the short plays and they will start to cover. But the shares wont stay at $4 as the shorts scramble to cover. This will be a runaway freight train as a 70% short interest desperately goes wild. And insiders cant sell into all this as they have to follow selling rules to avoid insider trading violations. This will be an AIG monster short cover rally all over again.

    So you see, PALMs stock is heading for a much bigger splash than the company is. That is what investors should be focusing on. And its anybody guess how the crazy price action will affect an eventual PALM buyout.

    As for the company long term, its too soon to be thinking about that. ;)

  • Report this Comment On March 05, 2010, at 12:01 AM, gslusher wrote:

    I doubt that Apple or RIM buying a competitor would go over very well with the SEC or US DoJ, especially as either would probably just kill Palm's products. Very little Palm makes or has would be useful to either RIM or Apple. Palm may well die the death it should have died several years ago when the Treo got passed by not just the iPhone, but most other "smartphones." Everyone I know who had a Treo now has an iPhone.

  • Report this Comment On March 05, 2010, at 2:19 AM, mightymatt24 wrote:

    @ FreeRange1 Yes, it is essentially flipping a switch to enable multitasking, however, there is a lot more to it than that. First, Apple needs to come up with a metaphor that makes sense to users which will allow them to switch between applications. I'm not saying this is impossible for Apple to do, just that they need to do it. Also, they need to optimize batterylife, and speed. Again, I don't think they need to buy palm to do either of these. Apple has metaphors such as expose, that may work okay for this, and maybe can translate that to an phone size screen.

    @gslusher I think that the thing that cannot be understated about the cell phone market is that people are fickle, and buy a new phone every two years or so. I think that Palm has done enough interesting, and innovative things, and implemented many things in a solid manner, that they could create a value proposition in which it makes sense for users to switch. The thing is, they need more resources than they have right now in order to do that. I think that they could do this with a cash infusion, which would allow them to expand their development team. I do think that they would be a much stronger competitor if they had the resources of a dell or an hp behind them. Also, I think it would be an incredibly smart move if samsung made a play at Palm...here's another wild speculative guess at a company that may be interested in buying Palm:Amazon???? crazier things have happened I guess...

  • Report this Comment On March 05, 2010, at 2:24 AM, mightymatt24 wrote:

    @FreeRange1 sorry i was a little unclear. I meant Apples hubris is keeping them from enabling multitasking. I truly thing that Apple feels as though the way the phone should work is pop into an app, pop out of an app.

    For awhile I thought the same thing that you did:eventually technology will catch up and allow apple to do enable multitasking without worrying about speed and battery. The thing that changed my mind about this was/is the Ipad. The Ipad is clearly powerful enough to run multiple apps. It seems to me that Apple thinks that they have it right the way things are now.

    I could be wrong about this, and multitasking could happen in June...but right now I am skeptical that it will happen....

  • Report this Comment On March 05, 2010, at 8:37 AM, mightymatt24 wrote:

    @FreeRange1 sorry i was a little unclear. I meant Apples hubris is keeping them from enabling multitasking. I truly thing that Apple feels as though the way the phone should work is pop into an app, pop out of an app.

    For awhile I thought the same thing that you did:eventually technology will catch up and allow apple to do enable multitasking without worrying about speed and battery. The thing that changed my mind about this was/is the Ipad. The Ipad is clearly powerful enough to run multiple apps. It seems to me that Apple thinks that they have it right the way things are now.

    I could be wrong about this, and multitasking could happen in June...but right now I am skeptical that it will happen....

  • Report this Comment On March 05, 2010, at 11:22 AM, TMFMileHigh wrote:

    @mightymatt24,

    Thanks for writing and for your very detailed comments.

    >>Suggesting that "There's enough commonality here to make integrating the two worthwhile," is absurd. Android has much in common with the blackberry o.s. and almost nothing in common with web os.

    You make an important point here and I owe readers an apology. Android is, indeed, built on a modified Java virtual machine called Dalvik. Palm's webOS handles applications via a custom "UI System manager" whose key component is an embedded WebKit rendering engine.

    BlackBerry OS is almost entirely based on Java. The iPhone ignores Java, some would say to its detriment. (Though market share numbers wouldn't support that conclusion, nor would the App Store's bloated inventory.)

    Still, I think it's important to point out that webOS is unlike any other smartphone OS. It's the first to use common Web authoring technologies to create native, rather than browser-based, apps. By definition, none of the other OS owners could be a perfect fit.

    >>Dell and HP are the most likely buyers.

    HP would be better than Dell because HP is filling the consumer gap that IBM created when it sold its PC business to Lenovo.

    For Dell, I still think smartphones are a costly distraction. There's not enough margin to be had; subsidies are getting smaller, competition fiercer.

    Palm needs a suitor with the patience and capital to build its business. Dell is walking too tight a rope to be that sort of partner, but I will grant that HP could be exactly what Palm needs.

    >>Apple: Purchasing palm, would be equivalent to Steve jobs saying "I was wrong." Which will never happen. Steve Jobs would much prefer watching Rubes crash and burn than in integrating palm and making their products better.

    That would certainly fit Jobs' public persona,but I wonder if you're overstating the degree to which Jobs will base a business decision on pride.

    Remember, it was Steve Jobs who visibly swallowed his pride in introducing Microsoft as a partner at Macworld Boston in 1997:

    http://www.youtube.com/watch?v=WxOp5mBY9IY

    Thanks again for the corrections and additional insights.

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On March 05, 2010, at 11:23 AM, TMFMileHigh wrote:

    @mightymatt24,

    Thanks for writing and for your very detailed comments.

    >>Suggesting that "There's enough commonality here to make integrating the two worthwhile," is absurd. Android has much in common with the blackberry o.s. and almost nothing in common with web os.

    You make an important point here and I owe readers an apology. Android is, indeed, built on a modified Java virtual machine called Dalvik. Palm's webOS handles applications via a custom "UI System manager" whose key component is an embedded WebKit rendering engine.

    BlackBerry OS is almost entirely based on Java. The iPhone ignores Java, some would say to its detriment. (Though market share numbers wouldn't support that conclusion, nor would the App Store's bloated inventory.)

    Still, I think it's important to point out that webOS is unlike any other smartphone OS. It's the first to use common Web authoring technologies to create native, rather than browser-based, apps. By definition, none of the other OS owners could be a perfect fit.

    >>Dell and HP are the most likely buyers.

    HP would be better than Dell because HP is filling the consumer gap that IBM created when it sold its PC business to Lenovo.

    For Dell, I still think smartphones are a costly distraction. There's not enough margin to be had; subsidies are getting smaller, competition fiercer.

    Palm needs a suitor with the patience and capital to build its business. Dell is walking too tight a rope to be that sort of partner, but I will grant that HP could be exactly what Palm needs.

    >>Apple: Purchasing palm, would be equivalent to Steve jobs saying "I was wrong." Which will never happen. Steve Jobs would much prefer watching Rubes crash and burn than in integrating palm and making their products better.

    That would certainly fit Jobs' public persona,but I wonder if you're overstating the degree to which Jobs will base a business decision on pride.

    Remember, it was Steve Jobs who visibly swallowed his pride in introducing Microsoft as a partner at Macworld Boston in 1997:

    http://www.youtube.com/watch?v=WxOp5mBY9IY

    Thanks again for the corrections and additional insights.

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On March 07, 2010, at 8:08 PM, HellcatM wrote:

    Apple will never buy Palm. You're saying Apple would buy Palm because its based off WebKit? I can put the same thought into Google buying Palm because when you buy a Pre or Pixi you already have to sign into Gmail, and it uses a lot of Google tools.

    I think it would make more sense for HTC or Casio/Hitachi/NEC or Panasonic/Sanyo to buy Palm because they make phones and don't already have an OS. Any of these three companies has the money and would be better off buying Palm than Apple.

  • Report this Comment On March 07, 2010, at 8:21 PM, HellcatM wrote:

    Oh let me add one more company to my list...Qualcomm. They make many of the components for phones already, if they bought Palm then they can make the phones cheaper because of this.

  • Report this Comment On March 07, 2010, at 8:22 PM, HellcatM wrote:

    Oh let me add one more company to my list...Qualcomm. They make many of the components for phones already, if they bought Palm then they can make the phones cheaper because of this.

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