This Ridiculous Dell Rumor Will Not Die

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This rumor had its fun in the sun, but let's put it out to pasture now. Dell (Nasdaq: DELL  ) is not buying Palm (Nasdaq: PALM  ) anytime soon.

The rumor mill started last Thursday, after The Wall Street Journal reported that someone "who has spoken" with Michael Dell stated that Dell was looking to acquire a "significant-sized company." Hours after the Journal piece, a post from a blog in The Dallas Morning News pegged Palm as a natural target for Dell. But an even bigger boost to the buyout rumor came on Friday, from a Collins Stewart analyst note that said Dell swallowing Palm would "be born of mutual necessity and represent a strategic fit for both parties."

That line of thinking just may sound like it makes sense, but there's a small problem: There's no evidence that Dell is even considering a bid for Palm. Fellow Fool Rick Munarriz was quick to swat down the rumors last week, as did The New York Times on Monday, but rumors have a pesky way of sticking around.

So why did Palm's shares rise 21% last Thursday and Friday, when the buyout chatter was picking up steam? As I see it, it's another example of how stock prices can move on baseless speculation. There wasn't any hard information to "price in" -- just a vague report that Dell's looking to buy, has nascent smartphone ambitions, and that Palm could be a possible fit. (And to be fair, surely a portion of that gain bled over from enthusiasm for Jon Rubinstein taking over as CEO.)

Why it won't happen
Look, I think WebOS appears to be a fantastic platform and holds a lot of value for Palm. It's undeniable that the company is worth significantly more today than it was during its doldrums in December, when its share price was a tenth of what it was on Tuesday. 

However, Dell and Palm don't look like a match made in heaven. Is stodgy old low-price Dell really willing to pay up heavily for an unproven platform that has been on the market for a couple of weeks? I just don't think so, at least not at the price it would take to get a deal done now. While a company of Dell's size brings with it a well-established corporate user base, along with its own manufacturing connections and the opportunity to scale up production and sales, you have to wonder whether the benefits are worth it. Remember, Dell would be buying Palm largely on the strength of its software -- not exactly Dell's strong suit.

So instead, let's look to the information we do have. For one, Dell sold $1 billion in bonds last week. That lends support to the Journal's reports that it's looking to buy. But if you actually read past the second paragraph of that story, insiders reportedly said that Dell was looking to acquire data storage and tech services companies. How that morphed into Palm buyout rumors is hard to explain.

As pointed out in one comment on Rick's Dell article, companies like 3PAR (NYSE: PAR  ) or Isilon (Nasdaq: ISLN  ) would be much more reasonable choices for Dell, with their emphasis on storage technology. Or here's another idea: QLogic (Nasdaq: QLGC  ) , a company that makes products that help servers communicate and would add far more to Dell's core business.

Of course, I don't have any specific knowledge about whether Dell is actually interested in any of these three companies either. But as we saw last week, that never stopped anyone from engaging in wild speculation.

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Fool contributor Eric Bleeker holds no position in any of the companies discussed above. The Motley Fool disclosure policy was offered a $10 billion buyout from a giant, faceless corporation, but turned it down. It just loves you, its faithful readers, that much! Touching, isn't it?

Read/Post Comments (4) | Recommend This Article (20)

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 June 17, 2009, at 7:33 PM, nodice987 wrote:

    hey Eric, did it ever occur to you that the PALM stock price was not going up because of the "ridiculous rumor" and was going up because PALM had a very successful release of its product into the hottest product space today which includes RIMM and APPL? and that they sold out of the PALM Pre on the opening weekend? and the PALM software received rave reviews from both consumers and techies?

  • Report this Comment On June 17, 2009, at 7:41 PM, nodice987 wrote:

    Also, Eric, it is pretty obvious that Dell needs to and intends to follow the strategy that has been laid out by both HP and IBM which involves bundling hardware, software, and services together. While software is not Dell's current strength, it's not all that unreasonable that Dell might be interested in buying a company such as PALM to use as the basis of the software strategy in addition to buying a services company. For a hardware company like Dell to buy a services company and not also be interested in entering the very high margin software industry is what i would call ridiculous.

  • Report this Comment On June 18, 2009, at 10:16 AM, TMFRhino wrote:

    Hi Nodice,

    That thought did occur to me, however consider that their stock fell 10% the first trading day after the Pre's release based on initial reports. Yes, they sold out, but its left to each analysts discretion whether that was entirely impressive since the unit count has been estimated at 50,000-100,000 depending on your source. My point is, they sold out, but whether or not it was a "home run" isn't exactly established yet. Personally, I think WebOS looks great and is a valuable asset for Palm, but I'll hold my judgement for when they're releasing a large volume of phones.

    I don't want to get too into "reading the market's mind", but the news of both those days was almost entirely acqusition chatter. This week, for example, there was also some more positive analyst statements about the Pre which is movement more attributable to their product. However, its pretty clear what was predominantly at work last week.

    Finally, you're right, Dell is trying to move into that space. To some degree the deal makes sense or else there would have never been chatter in the first place. However, I happen to agree with this NY Times piece:

    There's key differences between how HP & Dell could digest a company like Palm. They could elaborate better than I could in this space.

    Michael Dell did call out buying a tech services company, but using Palm around that strategy seems like a risky way for the company to potentially blow half its cash load, especially when its been struggling to grow organically and needs to make smart acquisitions going forward. Besides, the key point is that there's no reason to pontificate on this buyout, its all a media invention (So why am I yammering about it still? :))

    Anyway, thanks for the comments and you're perfeclty willing to disagree with any of these comments.

    Fool on!


  • Report this Comment On June 18, 2009, at 10:18 AM, TMFRhino wrote:

    Errrr... "feel perfectly willing."

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