SHANGHAI Money-losing smartphone maker Palm Inc PALM.O tapped Huawei Technologies HWT.UL for preliminary acquisition talks, a move that would give the Chinese telecommunications equipment maker a foothold in the premium mobile phone market.
Palm contacted Huawei's investment bank in mid-February for "preliminary discussions," a source said, speaking on condition of anonymity because the process has not been made public.
The source said on Tuesday discussions have not moved forward since then.
"As a matter of policy, Huawei does not comment on speculation about possible mergers or acquisitions. Huawei is always open to consider opportunities that will further enhance its business development," the company said in a statement.
Palm has hired bankers to explore several options, including a sale of the company, whose smartphone sales have suffered against Apple's (AAPL.O) iPhone and Research in Motion's RIMM.O RIM.TO BlackBerry.
Shares of Palm have jumped more than 55 percent in the past week on speculation about a potential sale of the company.
But the stock fell 11 percent to $5.33 on Tuesday after analysts suggested the rally has made the company too pricey.
"We remain concerned that it may be a 'take-under,' meaning a price that is below its current share price," Kaufman Bros analyst Shaw Wu said in a note. "This is due to Palm's large operating losses and likelihood that operating expenses remain high due to investment required to stay competitive in the smartphone space."
Palm has been considered a target for larger companies hoping to enter or expand in the mobile market for years.
Based on recent deals in the technology sector, Palm could potentially fetch $1.3 billion, given its current $1 billion market capitalization and the 30 percent premium recently paid in tech deals. Analysts, however, doubt bids will reach that high.
Analysts view ZTE Corp (0763.HK) (000063.SZ), China's No. 2 telecommunications equipment maker, as another possible suitor. ZTE could not be reached for comment.
"Huawei and ZTE are potential buyers. It makes sense: they don't have an operating system or a brand, but they have cheap manufacturing costs and money to invest and develop the brand," said IDC analyst Francisco Jeronimo in London. "Consumers don't associate Chinese brands with quality products and don't pay a premium for such a mobile phone ... Palm would be perfect for them."
Huawei and ZTE are two of China's biggest success stories, banking on demand from a strong domestic market and growing success overseas, where they compete with the likes of Ericsson (ERICb.ST) and Nokia Siemens Networks NOKI.UL.
Other potential suitors include HTC Corp (2498.TW) and Lenovo Group (0992.HK). Dell Inc DELL.O, Microsoft (MSFT.O), Nokia NOK1V.HE and Motorola Inc MOT.N have been named in the past as potential suitors.
(Additional reporting by Tarmo Virki in Helsinki, and Franklin Paul in New York; Editing by Chris Lewis and Derek Caney)