What Does This Hedge Fund Know About Palm?

While two Wall Street analysts have decided that Palm's (Nasdaq: PALM  ) shares are worth as much as a limited-edition Tyler Green rookie card (which is to say, nothing), one big hedge fund has a very different opinion. Maybe this fund knows something about Palm's future that the rest of us don't, but it's also possible that it just understands a fact that many other investors are also aware of: Palm can still be pretty valuable in the right hands.

The news of Harbinger Capital's giant stake in Palm, which stood at 9.48% at the end of March, comes when Wall Street's sentiment toward the company has turned deeply negative. Not only have Morgan Joseph & Co's. Ilya Grozovsky and Canaccord Adams' Peter Misek given Palm a price target of $0, but only two of the 28 analysts covering the company (according to Thomson/First Call) rate its shares a buy. If I thought Palm would continue trying to slug it out in a fiercely competitive smartphone market, I might agree with the pessimists. But since the company has already hired Goldman Sachs to help it find a buyer, it looks as if Palm has resigned itself to being another storied tech pioneer that couldn't stay independent anymore. And in that context, I think the company is anything but worthless.

I think the best historical comparison here is IBM's (NYSE: IBM  ) 2005 sale of its PC division to China's Lenovo Group for $1.75 billion. Like Palm, IBM's PC division was both bleeding cash and losing market share to hungry competitors, a situation that led some to think the business couldn't be sold. But also like Palm, the unit had smart engineers, some well-known brands, a strong patent portfolio, and a decent North American presence. Put into the hands of a low-cost Asian manufacturer such as Lenovo, those assets ended up being pretty valuable: Gartner estimated that Lenovo's global PC market share stood at 8.3% in the first quarter, up from 6.6% a year before, and good for fourth place overall.

Why HTC needs to act
So which company can play the role of Lenovo for Palm? Like my colleague Rich Smith, I'm skeptical that it'll be Lenovo itself. But I think either Huawei Technologies or HTC could work. Both companies have been rumored to covet Palm, have the cash to pull off an acquisition, and could quickly bring down the company's manufacturing costs. But while Huawei could benefit from buying Palm -- especially if it gets Palm's engineers working on some good Google (Nasdaq: GOOG  ) Android phones -- HTC simply needs to make a deal happen, for a few reasons:

  • HTC's smartphone lineup gets an immediate branding boost. To put it mildly, HTC's brand power isn't at the same level as that of Apple (Nasdaq: AAPL  ) or a Nokia (NYSE: NOK  ) . Perhaps Palm's brand isn't, either, but the company's legacy does give it some additional value.
  • Palm's technology could be ported to HTC's existing phones. HTC has had some success in differentiating its Android and Windows Mobile phones from the pack through its Sense user interface. But integrating some of the neat features in Palm's webOS operating system, such as its live application previews and cascading notifications, would take the company much further.
  • Apple, Apple, Apple. There's a big reason Steve Jobs chose to send his lawyers after HTC instead of, say, Motorola (NYSE: MOT  ) or Samsung: Those companies could probably sue Apple for patent infringement as easily as Apple could sue them. With Palm's patents in the picture, Jobs might have a weaker hand against HTC going forward.

Palm's hopes for reliving its glory days as a smartphone leader may be shattered, but this doesn't mean a company such as HTC won't assign it a price tag well north of $0. I'm guessing that Harbinger Capital is well aware of that.

Fool contributor Eric Jhonsa can still remember pulling that Tyler Green rookie card out of a pack. He has no position in any of the companies mentioned. Nokia is a Motley Fool Inside Value recommendation. Google is a Motley Fool Rule Breakers selection. Apple is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 15, 2010, at 4:20 PM, tomjones2010 wrote:

    Finally an educated and well written analysis of the latest developments with PALM.

    I can not understand how any rightful analyst would go out and assign a $0 valuation to a company such as PALM -- only explanation is to get his name mentioned in the press...unfortunate to Morgan Joseph and Canaccord Adams, their names will be forever regarded as the firms that care more about getting their names out there rather than put out objective analysis that helps their clients.

    As Apple has demonstrated, it takes:

    1) Great Design,

    2) Great Branding

    3) Good Engineering,

    4) Low Cost Manufacturing, and

    5) A Patent Portfolio

    A marriage of HTC and PALM will give the newly formed Company all of the above and more to be able to compete in an ever growing segment.

  • Report this Comment On April 15, 2010, at 5:34 PM, gslusher wrote:

    "Perhaps Palm's brand isn't, either, but the company's legacy does give it some additional value."

    I'm not sure. Palm's "legacy" includes years of problems with the Treo phones, a major gaff with the Foleo, and sales of the Pre phones so bad that Verizon has had a "Buy-one-get-one" sale since the moment they started carrying the Pre Plus.

  • Report this Comment On April 15, 2010, at 5:46 PM, NorthPierCIO wrote:

    The comp to IBM's PC division is on the right track but only scratches the surface. Firstly, Gartner has the smart phone space growing at 30%+ a year for the next several years. That’s 525 million handsets in 2012 folks. The PC industry was hardly in that growth phase in 2005…maybe 1995. Next: It’s the apps, stupid. If you don’t control your ecosystem, you don’t get a piece of the fee. Google makes its money on driving search traffic, a good model. But Apple get’s theirs from the apps & the iPhone. Palm gets this, HTC, MOT, NOK, etc. didn’t. MSFT will lose this game too (again) as they don’t control the hardware. How much is an OS worth without the rest of the ecosystem? Google practically gives theirs away Mr. Softy. You need the whole piece folks.

    So that’s where we are. If you aren’t RIMM (with a dinosaur of an OS), Apple, or Google, how do you get your hands on a stake of the fastest growing industry in tech? There’s only one golden ticket left investors, and Palm is it. Now can their acquirer/partner make a go of this flailing company? Who knows. But at $1bln-$2bln dollars, that’s a cheap lottery ticket for a piece of a pot worth $250bln/year in 5 years.

    No wonder one of the most forward thinking hedge-fund managers in the county is buying, unlike the analysts that would have you believe that Palm should be priced on EBITDA (like they’re in the business of selling tube socks).

    EBITDA? Give me a break…

  • Report this Comment On April 15, 2010, at 5:55 PM, NorthPierCIO wrote:

    The comp to IBM's PC division is on the right track but only scratches the surface. Firstly, Gartner has the smart phone space growing at 30%+ a year for the next several years. That’s 525 million handsets in 2012 folks. The PC industry was hardly in that growth phase in 2005…maybe 1995. Next: It’s the apps, stupid. If you don’t control your ecosystem, you don’t get a piece of the fee. Google makes its money on driving search traffic, a good model. But Apple get’s theirs from the apps & the iPhone. Palm gets this, HTC, MOT, NOK, etc. didn’t. MSFT will lose this game too (again) as they don’t control the hardware. How much is an OS worth without the rest of the ecosystem? Google practically gives theirs away Mr. Softy. You need the whole piece folks.

    So that’s where we are. If you aren’t RIMM (with a dinosaur of an OS), Apple, or Google, how do you get your hands on a stake of the fastest growing industry in tech? There’s only one golden ticket left investors, and Palm is it. Now can their acquirer/partner make a go of this flailing company? Who knows. But at $1bln-$2bln dollars, that’s a cheap lottery ticket for a piece of a pot worth $250bln/year in 5 years.

    No wonder one of the most forward thinking hedge-fund managers in the county is buying, unlike the analysts that would have you believe that Palm should be priced on EBITDA (like they’re in the business of selling tube socks).

    EBITDA? Give me a break…

  • Report this Comment On April 15, 2010, at 8:23 PM, TiberiousMaximus wrote:

    I like your analysis and this is exactly the base of my thesis why I think Palm has lots of potentials. Has anyone actually looked at the phones? I have a blackberry and if I wasn't in the investment profession, I'd be the first to get those phones. I think the Palm has the best balance between functionality (for work and business which is something iphone lacks since its a toy) and an amazing OS (which blackberry doesn't have a clue what that would be)

  • Report this Comment On April 15, 2010, at 8:23 PM, TiberiousMaximus wrote:

    I like your analysis and this is exactly the base of my thesis why I think Palm has lots of potentials. Has anyone actually looked at the phones? I have a blackberry and if I wasn't in the investment profession, I'd be the first to get those phones. I think the Palm has the best balance between functionality (for work and business which is something iphone lacks since its a toy) and an amazing OS (which blackberry doesn't have a clue what that would be)

  • Report this Comment On April 15, 2010, at 9:46 PM, ozzfan1317 wrote:

    Palm is not worthless and I agree someone will b uy them I just disagree with the assumption that a premium will be paid. The patents and Web OS do not erase the damage they have done to their brand or their nearly 400 million debt load.

  • Report this Comment On April 15, 2010, at 9:46 PM, ozzfan1317 wrote:

    Palm is not worthless and I agree someone will b uy them I just disagree with the assumption that a premium will be paid. The patents and Web OS do not erase the damage they have done to their brand or their nearly 400 million debt load.

  • Report this Comment On April 16, 2010, at 8:21 AM, hudsondusters wrote:

    Goldman is helping them find a buyer? Is this the same Goldman that led the secondary at $16.25 about 6 months ago?

    It's not fetching that in a sale. Most of the folks touting a sale were touting Palm much higher, and ignoring only-relevant-to-tube-sock-companies ebitda and other staid metrics.

    Last summer and fall the $30 by xmas posts were flying fast and furious on the yahoo PALM message board. It may get a premium from $5, but that was daft, and management essentially stuffed the channel and gave rosy revenue projections, or lied. Right when they were raising that $16.25 a share.

  • Report this Comment On April 16, 2010, at 8:34 AM, hudsondusters wrote:

    Goldman is helping them find a buyer? Is this the same Goldman that led the secondary at $16.25 about 6 months ago?

    It's not fetching that in a sale. Most of the folks touting a sale were touting Palm much higher, and ignoring only-relevant-to-tube-sock-companies ebitda and other staid metrics.

    Last summer and fall the $30 by xmas posts were flying fast and furious on the yahoo PALM message board. It may get a premium from $5, but that was daft, and management essentially stuffed the channel and gave rosy revenue projections, or lied. Right when they were raising that $16.25 a share.

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