Deal chatter engulfs Palm, but price tag high

NEW YORK Wed Sep 23, 2009 5:01pm EDT

The Palm Pre cellular phone and Touchstone magnetic charger can be seen in New York June 3, 2009.REUTERS/Lucas Jackson

The Palm Pre cellular phone and Touchstone magnetic charger can be seen in New York June 3, 2009.

Credit: Reuters/Lucas Jackson

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NEW YORK (Reuters) - Ever since it launched the Pre, smartphone maker Palm Inc PALM.O has been quite the belle of the ball, if deal chatter is any indication.

Technology companies Dell Inc DELL.O and Microsoft Corp (MSFT.O) and handset manufacturers Nokia (NOK1V.HE) and Motorola MOT.N have all been named as potential suitors.

Driving the deal speculation is the promise of Palm's new Pre phone and tricked-out software, which impressed industry analysts when it launched in January.

Bankers and analysts say Palm could catch the fancy of any company that wants to bolster its mobile presence and provide a challenge to Apple Inc's (AAPL.O) iPhone and Research in Motion's RIM.TO BlackBerry devices.

But Palm's newfound sexiness may not lead to a deal in the near future because the company is too expensive.

"The biggest hurdle is the price," said Kaufman Bros analyst Shaw Wu, of a Palm deal. "No one is arguing in terms of the merits. It boils down to price."

Palm's stock has quadrupled this year on buzz around its new phone and software. Yet, details on how many units it has sold are skimpy, making it difficult to value the success of Palm's turnaround story.

That has not deterred market chatter. Earlier this week, Palm shares soared on rumors that Nokia, the world's largest mobile handset maker, was interested in bidding for the Sunnyvale, California company.

People expect that Palm, one of the earliest smartphone makers, will be able to break the grip of iPhones and BlackBerries, but may lack the scale to do so on its own.

"Palm now has a product that looks much better, and the company probably needs scale," said Peter Bell, a venture capitalist at Highland Capital Partners, whose firm invests in technology and mobile companies.

"Palm's got to be part of something else to be a player."

RUMORS APLENTY, BUT NO REAL BUYERS

Some analysts have suggested that Dell could make a play for Palm as it seeks growth opportunities outside its low-margin hardware business. Dell is building mobile devices for the Chinese market, which has also fueled speculation about a combination.

But Dell, which had $11.7 billion in cash at the end of July, instead chose to beef up through its recent $3.9 billion acquisition of technology services company Perot Systems Inc.

Although a mobile acquisition is not inconsistent with Dell's strategy of building its consumer presence, the hardware maker is "probably not going to go after Palm immediately after buying Perot," one technology banker said.

For Dell -- or even Hewlett-Packard Co (HPQ.N), which makes the iPAQ pocket PC -- to buy Palm would mean spending millions of dollars on marketing and distribution, since neither company has a strong mobile presence, analysts said.

Palm's market capitalization is $2.4 billion. Based on the average 34 percent premium that technology, media and telecommunications companies have been sold for this year, according to Thomson Reuters data, this means a price tag of about $3.2 billion.

Microsoft is another competitor that bankers and analysts suggest could buy Palm, in which private equity firm Elevation Partners owns a sizable stake.

With $25.3 billion in cash and securities, Microsoft "should just ditch Windows Mobile and buy Palm," a second technology banker said, referring to the software giant's smartphone operating system. The bankers spoke anonymously because many of these companies are clients.

But analysts believe potential buyers will hold back until they have a clearer picture of Palm's success.

In the longer term, Palm could be a good asset for Finnish giant Nokia, Avian Securities analyst Matthew Thornton said.

"Nokia gets a more competitive smartphone platform, which has been a big knock against Nokia," Thornton said. "In addition, they get penetration into North America, where they have tried for years and just can't seem to get it."

C.L. King & Associates analyst Lawrence Harris cast doubt on the rationale for a Palm-Nokia deal, suggesting Nokia could instead license Palm's Web OS operating system.

"That would seem to me a more sensible route than buying the company at a rich valuation," he said.

(Reporting by Anupreeta Das, additional reporting by Franklin Paul in New York and Tarmo Virki in Helsinki; Editing by Edwin Chan, Gary Hill)

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