Is Lenovo Palm's White Knight?

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For Palm (Nasdaq: PALM  ) shareholders, hope springs eternal.

Just weeks after my esteemed Foolish colleague Rick Munarriz raised up a rogues gallery of potential saviors for the fast-approaching-oblivion Palm, the market rumor mill is at it again, churning up likely (and unlikely) suspects who might be willing to give Palm a hand. The latest theory: China.

Specifically, Chinese tech star Lenovo. Rumor has it that the Big L is looking to expand its mobile footprint, and may follow on the heels of fellow Chinese acquirers who've been picking over the wreckage of Western Capitalism, snapping up pieces of everything from Ford (NYSE: F  ) to Huffy lately. Suspicions that Lenovo might bid for Palm sent Palm's shares up 20% yesterday. But is there anything to the rumor?

Survey says: No
Judging from the price spike at Palm, it seems speculators (or perhaps short-sale closers) are giving the rumor credence. But over at Kaufman Bros., the experts tend to disagree. Asked to opine on the possibility yesterday, Kaufman allowed that, yeah:"Lenovo is possible, but I'm not sure they have the balance sheet for this. Hewlett-Packard (NYSE: HPQ  ) is definitely more plausible."

You're half right
Seriously, Kaufman? The H-P theory again? I thought we had put that rumor to bed last month. But, OK. If it's still buzzing around out there, I'll make one more attempt to swat it down. So for those who missed it last time 'round, here's the list of potential Palm buyers -- and why none of 'em will work out:

  • Nokia (NYSE: NOK  ) doesn't need Palm's OS. (It's already doubling down on Symbian).
  • Microsoft (Nasdaq: MSFT  ) doesn't want it. A Linux-based operation system is anathema to the Giant from Redmond.
  • And as for H-P ... like I said before, H-P's just too durn smart to buy a loser like Palm. Plus, are our memories so short? Have we already forgotten H-P's expanded alliance with Microsoft, announced just three months ago? I seriously doubt H-P's going to go rocking the boat so soon, offending Mr. Softy by buying Palm.
  • Dell (Nasdaq: DELL  ) ? Yeah, Dell's dumb enough[EB2]  to stick its hand into Palm's hornets' nest. But fortunately, Dell's still busy trying to get Perot in hand, to entertain thoughts of further expansion. Not gonna happen.

Unlucky in Lenovo
Which returns us to where we began: Lenovo.

Kaufman tells us that Lenovo's lacking the cash it would need to buy Palm. On the one hand, I'm inclined to argue otherwise because to me, Lenovo's balance sheet looks pretty plump, stuffed with $3.8 billion worth of cash and equivalents, versus less than $825 million in debt. Plus -- as I've said before -- I think Palm is worth precisely $0. If that's the price it's charging, then Lenovo might very well ante up. (On the other hand, that wouldn't be particularly good news for Palm's current shareholders.)

And the other other hand: It's entirely possible that even a $0 price tag won't be low enough to entice Lenovo. I mean, few people would believe that Lenovo's previous high-profile high-tech acquisition resulted in resounding success. To the contrary, word has it that Lenovo experienced serious "integration" problems after buying IBM's (NYSE: IBM  ) PC business back in late 2004. Lenovo has managed to generate a total, companywide profit of less than $500 million since the acquisition closed nearly five years ago. That's hardly a sparkling return on investment from the $1.75 billion it laid out. Nor is it a result likely to encourage further foreign adventures on Lenovo's part.

Foolish takeaway
No, Palm shareholders, I'm afraid the Lenovo buyout rumor is just that: A rumor. No white knight's riding to save you from this investment. But who needs Lenovo, anyway? If the Pre turns out to be as big a success story as y'all were predicting last year, that shouldn't matter. I'm sure Palm will do just fine on its own.


Fool contributor Rich Smith has no position -- short or long -- in any of the stocks named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he was recently ranked No. 680 out of more than 160,000 members. The Motley Fool has a disclosure policy.

Microsoft and Nokia are Motley Fool Inside Value recommendations. Ford Motor is a Motley Fool Stock Advisor choice. Motley Fool Options has recommended a diagonal call position on Microsoft.

Read/Post Comments (11) | Recommend This Article (6)

Comments from our Foolish Readers

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  • Report this Comment On April 08, 2010, at 3:42 PM, cos267 wrote:

    First of all... this is a total foolish article. Palm is one of the biggest names in smartphones and was the biggest before smartphone even had its name. So Rich I don't know why you have so much of a beef with believing a company like lenovo or anyone else wouldn't pick up the Palm name. The only thing bad about Palm is its marketing and I believe they let him go. Sure Palm has had its beating, but it is licking its wounds and moving forward. The only thing I can gather is you are upset you didn't see a window of opportunity when you had the chance at $3.65. So lets not beat up a company when it is already down and trying to come up. Especially a company that is doing all it can to make it with so much competition. Here's to the future for Palm.

  • Report this Comment On April 08, 2010, at 4:27 PM, cos267 wrote:


  • Report this Comment On April 08, 2010, at 6:08 PM, SenhorAmazonas wrote:

    A buyout by Lennovo makes more sense than the other options but as I mentioned in a reponse to "4 Reasons Palm Isn't Heading to $0," Foxconn (another large Chinese manufacturer) would make more sense since Palm already has ties with them.

    Even so, what would you pay for a company with excess inventory (both internal and in the carrier pipelines) of products that no one is buying (even at firesale prices of $50) and $387 million in debt?

    If Palm could get someone to simply assume their debt, they should call the Vatican right away to come verify the miracle.

  • Report this Comment On April 08, 2010, at 6:28 PM, SenhorAmazonas wrote:

    ... and take a look at what Palm's officers are holding.

    More than half of their board has less than a $100k stake in the company (8 of 14). 5 of them have less than $10k Heck, a decent house near Palm's HQ costs a million (well maybe not a subprime foreclosure). Doesn't sound like they believe in themselves and they're the team running the show.

  • Report this Comment On April 08, 2010, at 7:47 PM, porktree wrote:

    "Palm is worth precisely $0" Do you know how much credibility you've lost for saying this?

    Mobile computing is the next big thing right now. Things like web access, gaming and all the useful apps would have require a big computer a few years back. Smart phones are getting more and more powerful and soon it will be able to do most things that you can do on your PC with added bonus of mobility.

    Why wouldn't the PC manufacturers like Lenovo, Dell and HP want a piece of that pie?

    The big problem for them is that they are too late to the game and have no track record especially when the market is already crowded with big players. The only way they can do right now is sell low end cheap phones. If they want to be a serious player then they need to buy PALM. PALM's current position makes it an attractive takeover target.

    Ask yourself, will you ever by a Dell or HP phone when there are so many better choices? Why did Dell buy Alienware or HP bought Voodoo gaming PC company when Dell/HP were already top companies in the same field? In fact, Alienware and Voodoo didn't even make their own PC. They just buy off the shelf components and put a pretty paint on it.

    It's all about brand name and users base, not to mention all the patents that PALM has in the field. Now, tell me why Lenovo, Dell and HP wouldn't want to buy PALM?

  • Report this Comment On April 08, 2010, at 7:56 PM, porktree wrote:

    Here is one more "rumor". HTC is in talk with PALM.

  • Report this Comment On April 08, 2010, at 7:56 PM, porktree wrote:

    Here is one more "rumor". HTC is in talk with PALM.

  • Report this Comment On April 09, 2010, at 9:24 AM, SenhorAmazonas wrote:

    It's good that Bono is a major stakeholder - this way they won't have to pay royalties for playing Sunday Bloody Sunday during the deathrow days of Palm. :>)

  • Report this Comment On April 09, 2010, at 9:49 AM, NorthPierCIO wrote:

    The folks being that talk about Palm equity being worth zero because of their debt are just plain foolish. WebOS took nearly $1bln in R&D spending on top of existing patents that were granted after billions more.

    Porktree has it right, "Mobile computing is the next big thing right now."

    But even more, it's apps that will drive revenue and profit in the next few years. If you aren't Google, making your money off of search traffic, you MUST control your whole ecosystem or you can't monetize app. sales. You can't engineer your way into a seat at that table anymore. That window is closed. Only Palm, Apple, Nokia and RIMM have closed ecosystems (and NOK’s and RIMMs need a successful facelift to stay competitive). There is a company out there (I am sure more than one) that gets this and understands that Palm is a cheap ticket to get a seat at the table.

    WebOS IS a fantastic, state of-the-art OS, undisputed. Hardware is easy to make these days. If HTC or another manufacturer buys Palm, they will have that component too. Then it's all about marketing and distribution. A $2bln investment in Palm (assuming a buyout around $10/share) and $1bln in brand development would yield $20bln+ annual sales in 5 years if they only gather a 5% market share. I’m not saying that someone else will be successful if they buy Palm, but someone will surely buy the lottery ticket for the biggest technology jackpot of the next decade, mobile computing. What's that equity worth now???

  • Report this Comment On April 09, 2010, at 10:51 AM, Mstinterestinman wrote:

    I can see someone waiting until they burn through their cash and are talking bankruptcy then buying them for 1.50 or 2.00 if any company even pays 5.00 for this mess they will regret the decision.

  • Report this Comment On April 09, 2010, at 12:02 PM, jakerome wrote:

    Stellar hand waving. Just the sort of numbers-free analysis that is now best known for. Carry on.

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