The founders of personal digital assistant pioneer Palm Inc. have returned to the fold as the company announced an all-stock, $169 million plan to acquire rival Handspring Inc.
Industry luminaries Jeff Hawkins and Donna Dubinsky founded Palm in 1992, but they left the company in 1997 to form rival Handspring. Now Hawkins and Dubinsky will return to the company they first founded, before it was acquired by U.S. Robotics and then later spun off as a public company. Hawkins will become the new company’s chief technology officer, while Dubinsky will sit on the new company’s board. The new company will be headed by Palm’s Todd Bradley and will be broken into two businesses-PDAs and smart phones. Handspring’s Ed Colligan will lead the smart-phone business. Palm’s operating system business will be spun off as part of the acquisition, a move Palm has long hinted at and one the company said likely will occur this fall.
Aside from the leadership and business changes, the move is also an acknowledgement of two main factors: Handspring couldn’t make it on its own in the smart-phone market, and Palm can’t make it on its own without a smart-phone business. The dynamic is evident in Handspring’s latest earnings-a $90 million loss on sales of $31 million, with only enough cash for the rest of the year-as well as Palm’s sluggish attempts to enter the mobile-phone market. Palm only recently introduced its first PDA/mobile-phone device.
“This goes a long way toward filling in (Palm’s) product portfolio,” said Phillip Redman, wireless research director at Gartner Group.
The worldwide PDA market declined 2 percent last year, according to Gartner, and it is expected to decline an additional 3 percent this year due to falling prices and lackluster demand. Redman said Palm needs to add more wireless functions to its product lineup to counter the market’s slide.
On the other hand, Handspring seems to have jumped into the wireless business too early. The company put all its efforts behind the Treo mobile-phone/PDA device, but it has suffered through sluggish sales. It reported 180,000 Treo customers in April.
However, industry watchers continue to proclaim the importance of the smart-phone market. Allied Business Intelligence Inc. predicts smart-phone shipments will double next year and will grow to 31 million by 2008.
“You need to have as much appeal and product segmentation as you can,” Gartner’s Redman said. “Handspring didn’t have that. Palm now does. Obviously wireless is growing … but right now it’s still a small part of the market.”
Through the move, Palm will add its PDA and enterprise expertise to Handspring’s wireless technology and carrier deals, including Handspring’s tight relationships with Sprint PCS and European carrier Orange plc.
The acquisition has one more major implication-its effect on Palm’s battle with Microsoft Corp. Palm blew open the market for PDAs, but Microsoft quickly countered with a rival operating system and formidable licensees, including Hewlett-Packard Co. and Dell Computer Corp. Palm is still far ahead of Microsoft on the OS front, according to Gartner, but sales of Palm OS units declined 10.5 percent last year, while Microsoft’s PDA OS units grew 24 percent.
“They’ve held their own pretty well (against Microsoft), and they will likely continue to hold their own,” said Stephen Baker, director of industry analysis with research firm NPD Group. Palm’s acquisition of Handspring “just keeps them in Microsoft’s way.”
Interestingly, Palm’s acquisition of Handspring will combine the top two Palm OS licensees into one company, possibly affecting the Palm operating system business after it is spun off. However, Redman shrugged off such concerns.
“If the volume units stay the same, then it should be the same” with one company as with two, he said.
Under the acquisition, all of the shares of the operating system business PalmSource owned by Palm will be distributed to Palm shareholders. Then, following the spinoff of PalmSource, Palm will issue 13.9 million shares to Handspring shareholders in exchange for their Handspring shares. The companies said they expect to cut about 125 combined employees and achieve improved operating efficiencies of about $25 million. The new company’s name has not yet been decided.
Investors seemed cheered by the news, sending Palm’s stock up almost 16 percent to about $14 per share following the news. Handspring’s stock was up almost 14 percent to about $1.26 per share.
