Is Palm Waving Goodbye?

Don't believe everything you hear, Fool.

Shares of Palm (NASDAQ:PALM) leaped sky-high yesterday and continued to rise this morning for a 23% two-day gain as I'm writing this. The company did report earnings recently, but that event is too old to explain any of this action. So what happened?

According to a Reuters report, the European markets are abuzz with rumors that Nokia (NYSE:NOK) might want to buy Palm. If true, there would be an instant profit in the customary buyout premium, and Nokia's rock-solid balance sheet would ensure the survival of Palm's products through hell or high water.

But there are other, much more logical explanations. Palm just announced that it will sell about 16 million new shares. Palm holds more debt than cash, produces negative cash flow, and faces lowered guidance below expectations, so it's easy to see why the company is looking to raise new capital. Its 11% dilution wouldn't normally be greeted with exuberant buying activity, but in this case, Palm sorely needs the cash infusion, and investors appear willing to open their wallets. Palm's secondary offering may be oversubscribed, according to several reports.

And it doesn't take much to set off a massive price swing in Palm's shares. According to Yahoo! Finance, financial institutions and Palm insiders hold nearly 100% of the float. But $212 million worth of Palm shares change hands every day -- a massive 8% of the float -- and about 30% of all Palm shares are sold short. In other words, the stock is easily manipulated by large market movers, and even small swings can start an avalanche in either direction.

When it comes to Nokia buying Palm, I don't see it happening. Nokia has committed itself to its own Maemo Linux and Symbian solutions. While the company has the global distribution and marketing influence that Palm needs to push its webOS platform, a third platform would only dilute Nokia's existing brands and confuse customers.

No, Nokia won't make any big acquisitions in the handset arena anytime soon. Research In Motion (NASDAQ:RIMM) is too expensive; and the phone gurus of Taiwan and South Korea are both too big and too committed to other software platforms like the Google (NASDAQ:GOOG) Android or Microsoft (NASDAQ:MSFT) Windows Mobile.

Likewise, I don't see anybody buying Palm outright. While Dell's (NASDAQ:DELL) previously been the target of Palm buyout speculation, it recently announced its acquisition of Perot Systems (NYSE:PER). I don't see it trying to digest two large, divergent businesses at once.

Sorry, Palm fans, but you're living on borrowed time. In my opinion, you'd be wise to take your profits before it's too late and reinvest them elsewhere.

Fellow Fool Tim Beyers knows how to make money on smartphones. Read all about it and discover his favorite phone peddler.