Motorola Inc. had planned to pay more than $300 million to acquire Palm OS vendor PalmSource Inc. That is, until Japanese software vendor Access Co. Ltd. upped its bid to $324 million in a dramatic 11th-hour turnaround.
Although such revelations offer a rare glimpse into corporate wheelings and dealings in the wireless space, the situation raises far more questions than answers. Chiefly, what did Motorola plan to do with PalmSource? And why was it willing to pay so much money for the company? Analysts remain perplexed, and Motorola is keeping mum.
The whole situation came to light thanks to separate filings from Motorola and PalmSource. First, PalmSource’s Securities and Exchange Commission filing included details about Access and the five-week bidding process that led up to the acquisition. PalmSource said the bidding war ultimately dwindled down to two suitors: Access and a firm it would only identify as “Company A.”
Motorola later revealed that it was “Company A” in a lawsuit it filed against PalmSource. The lawsuit alleges Motorola had wrapped up a $300 million deal with PalmSource’s board to acquire the company, but PalmSource shortly thereafter accepted a larger bid from Access. Motorola argues that PalmSource owes it an $8.7 million termination fee.
A PalmSource spokeswoman said the company believes Motorola’s lawsuit is without merit and said the company plans to fight the allegations.
According to the filings, PalmSource’s odyssey began in May, when both Motorola and Access indicated their desires to acquire the company. The solicitations come as no real surprise-PalmSource’s stock price and business had been declining over the past several months, and the company’s chief executive quit in May.
In order to evaluate the acquisition offers, PalmSource hired financial and business advisers to conduct a bidding process. Ultimately, Motorola, Access and two other unnamed companies agreed to participate in the auction.
The bidding started in August at around $12 per share-a premium for PalmSource, which at the time was trading at around $8 per share. One unnamed bidder dropped out at the beginning of the auction. The second unnamed bidder dropped out as the price climbed to around $16 per share.
Then, on Sept. 7, Motorola submitted a high bid for PalmSource of $17.25 per share in an all-cash transaction. PalmSource’s board agreed to the price and set about completing the deal. Indeed, PalmSource Chairman Jean-Louis Gassee sent an e-mail to Motorola’s chief executive Ed Zander thanking him for being “determined, patient and generous” and stating, “You can count on our full support to make this a success for Motorola.”
Then, in a surprise move later that day, Access sent PalmSource an unsolicited e-mail saying that it would raise its purchase price to $18.50 per share-all in cash. PalmSource began reviewing Access’ new high bid. During the course of the next day, Sept. 8, Motorola said it would raise its purchase price above $17.25 per share, but not as high as Access’ $18.50 benchmark. PalmSource’s board ultimately decided to go with the high bidder, Access, and publicly announced the acquisition Sept. 9.
Access’ purchase price of $18.50 per share values PalmSource at $324.3 million. The number represents an 83-percent premium on PalmSource’s shares, which were trading at around $10 per share before the acquisition.
Spurned, Motorola filed its lawsuit against PalmSource on Oct. 3 over the termination fee. Motorola’s lawsuit asks a Chicago court to award it an unspecified amount in damages.
Although the bidding made for some fine drama, it’s still unclear what Motorola had planned to do with PalmSource. Motorola doesn’t make Palm OS devices; indeed, the company has invested a significant amount of money and energy in Microsoft Corp.’s rival Windows Mobile platform.
Motorola may have wanted the Palm OS because of its popular user interface. Critics complain Motorola’s user interface is too complicated. But Motorola recently introduced a new UI it claims is much simpler and easier to use-so it’s unclear if the Palm OS user interface was a driving factor in the company’s acquisition plans.
Another factor may have been PalmSource’s move to Linux. The company has announced plans to move the Palm user interface onto a Linux platform. Motorola has been transitioning to a Linux platform for its phones.
Motorola also may have wanted PalmSource in order to get into the OS game. PalmSource counts a number of OS licensees, including Kyocera Wireless Corp., LG Electronics Co. Ltd. and Palm Inc. Motorola may have aspired to compete against Nokia Corp.’s Series 60 offering. Based on the Symbian OS, Nokia licenses its Series 60 platform to the likes of Panasonic, Samsung Electronics Co. Ltd. and others. With PalmSource, Motorola could have sold an alternative.
Industry watchers may never know what Motorola’s plans were. According to PalmSource’s SEC filings, Motorola on Sept. 6 “presented its strategy if the proposed strategic transaction were to proceed.” Likely, only the PalmSource and Motorola executives attending the meeting know what was said.
