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Why Nokia Might Be at Palm's Doorstep

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The two most plausible arguments for the recent run-up in Palm's (Nasdaq: PALM  ) shares?

  1. A short squeeze is under way, or 
  2. Investors are buying into a rumor that Nokia (NYSE: NOK  ) wants to make a bid for the company. 

Yesterday, Foolish writer Anders Bylund examined how and why a short squeeze might be occurring. With that in mind, let's look at why a buyout offer from Nokia could make sense.

Simply put, Nokia's smartphone business is now in something of a rut. Just a couple of years ago, the company seemed to have an unassailable position in the smartphone market, with popular devices running a combination of the Symbian operating system and Nokia's S60 user interface. 

Since then, however, we've seen Apple (Nasdaq: AAPL  ) and Research In Motion (Nasdaq: RIMM  ) steadily erode the company's share in this space. A report from market research firm Canalys had Nokia's worldwide smartphone share declining to 44.3% in the second quarter of 2009, a 1.1% drop from the prior year. In the same time frame, Research In Motion's share went up by 4.2%, and Apple's by a whopping 11.6% to 13.7% of the smartphone market. In Nokia's European heartland, the company's smartphone share fell by 7.2%.

Just as importantly, Apple and RIM command a level of consumer and developer enthusiasm that arguably goes beyond what Nokia possesses for Symbian. Search for Symbian applications online, and you can find a decent number of apps -- but nothing comparable to what's available on the iPhone's App Store. Big-name developers also seem somewhat more interested in creating apps for RIM's BlackBerry than the Symbian/S60 duo. Fewer installed apps means less loyalty to the underlying platform, which leaves consumers more open to switching.

One recent research report predicted that Apple's smartphone market share would eclipse Nokia's in 2011, and that by 2013, the latter's share would fall to 20%. But even if that forecast proves too pessimistic, Nokia clearly realizes that its Symbian-focused approach isn't good enough. Smartphones are continuing to soar as a percentage of global handset sales, with higher margins than less powerful phones.

That's why Nokia recently announced the N900, the first phone to run its Maemo operating system. But the N900 carries a high price tag, and Nokia itself is referring to it as a niche product, thus it might not be a runaway success. Also, while reviews of the N900 and Maemo have generally been positive, they give the impression of a smartphone product that is simply competitive, rather than revolutionary. And it will probably take a revolutionary product to stall Apple and RIM's momentum at this point -- just ask Google (Nasdaq: GOOG  ) , whose "competitive" Android platform is so far only a bit player in the smartphone market.

Palm's Pre, however, does arguably possess a revolutionary platform. Thanks to Palm's webOS operating system, the Pre can claim a number of unique features that Apple and RIM can't replicate, and which users rave about. And while Palm's recent guidance still suggests a tough competitive environment, you have to wonder about how successful a family of webOS devices might be with Nokia's R&D, sales, and marketing muscle behind them -- not to mention Nokia's global brand. When you consider that webOS, like Maemo, is based on Linux, and that in Palm's biggest market (North America), Nokia's smartphone market share is miniscule, and you can make a pretty compelling argument for Nokia to make a buyout offer.

Of course, Nokia's investments in Maemo could make it hesitant to abandon the platform for webOS. And Nokia has historically shied away from acquiring competing phone manufacturers -- even when rivals such as Qualcomm (Nasdaq: QCOM  ) , Siemens, and Motorola (NYSE: MOT  ) were putting their handset divisions on sale at bargain prices. In that light, a buyout of Palm would amount to a break with tradition.

To be clear, the reports of Nokia being interested in acquiring Palm are still just rumors, but desperate times call for desperate measures. And while Nokia's position in the smartphone market hasn't become desperate yet, the trend definitely isn't in the company's favor.

Fool contributor Eric Jhonsa has no position in any of the companies mentioned. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor recommendation. Nokia is a Motley Fool Inside Value selection. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is always the big winner.

Read/Post Comments (2) | Recommend This Article (4)

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 September 23, 2009, at 8:23 PM, SteveTrader wrote:

    Source of the false rumour that Nokia is going to buy Palm is a press release issued Tuesday in Finland, home of Nokia, about Nokia's purchase of Plum Ventures, Inc. That's Plum, P-L-U-M, not Palm! Of course if you are a non-English speaking Finn Palm and Plum are just two very similar, random sets of characters. That and previous Nokia/Palm rumors started the rumor anew in Finland. It jumped the big pond to The US, and back again to Europe, without the clarifying press release. Palm stock shot up when the rumor began circulating widely and still hovers above $17.00 a share. Wouldn't want to be long on Palm when this hits the wires. English version of release:

  • Report this Comment On September 24, 2009, at 9:12 AM, TMFRhino wrote:

    Hey SteveTrader,

    I'd seen a fair amount of coverage about Nokia acquiring Plum the week before, in fact the press release was issued on September 11th, not Tuesday:

    So, while that would be a hilarious story if true :), count me in as skeptical.

    Of course I'm also skeptical that Nokia is buying Palm.

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