Citing the slowdown in the U.S. economy and market conditions, personal digital assistant stalwart Palm Inc. and Extended Systems Inc., which provides mobile information management solutions, ended their proposed merger agreement.
“While this turn of events is disappointing, Palm and Extended Systems agree that this is the right thing to do at this time. Palm will continue to target the enterprise aggressively via leveraged partnerships and alliances with a number of companies, including Extended Systems,” said Carl Yankowski, chief executive officer of Palm. “We’ve worked well together in the past, and I expect more of the same to come.”
Many analysts felt the market conditions mentioned by the companies revolved around Palm’s stock price. When the all-stock deal was announced on March 6, Palm’s stock was trading at around $22 per share, valuing the proposed deal at $264 million. Since then, Palm’s stock has dropped dramatically to less than $8 per share, cutting the deal’s value to less than half of its original value. Extended Systems’ stock followed a similar path, trading near $25 per share when the deal was announced, only to fall to around $10 per share last week.
While not admitting Palm’s stock price was the main reason for the deal’s demise, Extended Systems said it played a factor.
“We felt Palm’s financial situation makes it difficult to integrate Extended Systems and meet its financial commitments,” Steve Simpson, chief executive officer of Extended Systems, said in a conference call announcing the termination of the deal. “Valuation became a factor and was a consideration in the decision, but we had a variety of considerations.”
Wit SoundView originally downgraded Extended Systems when the deal was announced due to risks associated with the deal, but quickly upgraded the company from hold to buy following the termination of the deal.
“Although we questioned the fairly modest price paid for [Extended Systems], we did not question the strategic fit between Extended Systems and Palm,” Wit SoundView said in a research report last Friday. “For Extended Systems, the deal gave the company the financial might it is going to need to take on the likes of Microsoft in the enterprise software space.”
When announced, the deal was seen as a good move by Palm to bolster its enterprise business and allow the company to offer products to larger corporations. By integrating Extended Systems’ solutions into Palm PDAs, the company could offer a Research In Motion-type device with additional functionality.
Questions regarding the viability if the merger were brought up in late March when Palm’s stock took a big dive to $8 per share, but most felt the deal would likely survive. At that time, directors and officers at Extended Systems had signed a proxy to vote their shares in favor of the deal, according to a Securities and Exchange Commission filing.
Since then, Palm has downgraded its future earnings, including one just after the deal with Extended Systems was nixed. The latest revision lowered fourth-quarter revenue from a projected $300 million to between $140 million and $160 million. The lowered outlook sent the company’s stock down nearly 30 percent last Friday to an all-time low of around $5 per share. More than 88 million shares traded hands by mid-day Friday, compared with an average trading day of 16 million shares.
“Our m500 family of handheld computers is shipping in volume later than we had hoped, precluding the opportunity for distributors, retailers and resellers to reorder in our fourth quarter,” Palm’s Yankowski said. “In addition, we believe that this delay stalled sales of our existing products in all regions. The shipment delay accounts for the bulk of our reduced revenue outlook and is exacerbated by the slowing economy, which we believe has spread beyond the U.S.”
Palm also said it expects to take a one-time charge of approximately $300 million during the quarter related to excess component and finished goods inventory and related costs.
Several analysts downgraded Palm after it released its revised forecasts, including Morgan Stanley, CIBC World Markets, Bear Stearns and JP Morgan.
Palm’s decline also affected its competition, most notably Handspring, which licenses Palm’s OS for its Visor PDAs. Handspring’s stock fell more than 12 percent last Friday, setting a new low of $8.50 per share.
While Palm’s future remains somewhat cloudy, Extended Systems is expected to rebound from the deal. Wit SoundView noted Extended Systems remained the “best-of-breed solution as witnessed by the fact that Palm explored more than 20 vendors before deciding to make the offer for Extended.”
While the company faced plenty of questions regarding its future viability, Karla Rosa, chief financial officer for Extended Systems, noted Extended Systems had plenty of cash on hand to remain a stand-alone company. Rosa explained that in addition to more than $4 million in cash on hand, Extended Systems had access to $10 million in financing. The company also did not incur any termination fees related to the deal, but it said there were some legal and banking fees it would have to handle.
In regards to any business losses incurred by the company during the merger process, Rosa admitted the company was somewhat distracted by the deal, and it did lose orders due to concerns regarding its ability to support operating systems that might compete with Palm’s OS.
“It’s hard to say how long it will take to make up for the lost orders,” Rosa said.
If Extended Systems is interested in another merger proposition, Wit SoundView said the company might not have to wait long. “Our sources have told us that other potential suitors may emerge now that Palm is out of the picture as those companies were afraid of upsetting their own relationships with Palm if they had made a hostile bid.”
