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Palm, Handspring stock surges on merger rumour

Makes strategic sense

Speculation that Handspring chief and Palm co-founder Jeff Hawkins might be about to do a Steve Jobs and sieze Palm's helm following the departure of Carl Jankowski has rekindled investor interest in the two companies.

Handspring's stock rise $1.41 to $5.41, while Palm's went up 44 cents to $3.87, both on heavy trading, but particularly in Palm's case. Palm's shareprice hasn't been this high since late August, but is still a long way off its 52-week high of $57.56.

At this stage, there's nothing to the story but rumour, though that was enough to get the Wall Street Journal on the case, and it's that paper's report that seems to have set PDA fans' pulses a-racing.

Handspring has denied that it's talking to Palm, but that may not have stopped Palm from approaching Hawkins informally. Carl Yankowski, Palm's former CEO, only quit last week, and even if he announced his decision to resign to the board some way ahead of the formal announcement, we reckon it's still too soon for any contact between Palm and Hawkins and/or Handspring to have progressed beyond very informal 'what do you think about...?' chats.

What's in it for them all?
Still, you can see the appeal to Palm. It not only gets its founder and original visionary back, but by it gets a leader for its hardware operation, soon to stand alone when the company spins off its operating system business under ex-Apple, ex-AT&T David Nagel. Hawkins, however, is arguably less interesting in running a business than designing technology, so it's unlikely he'd want the CEO's job, a role he has always delegated to Handspring and Palm co-founder Donna Dubinsky.

Getting them both back would allow Palm to not only eliminate a competitor - or vice versa, depending on the terms of the merger, and, given Handspring's superior position it would be the one calling the shots - but bring in some fresh designs. You can imagine the structure: the Palm team at the high end, Handspring becomes the consumer brand and Treo the smartphone offering.

The cost-savings merging both companies and the accompanying elimination of duplicated overheads would appeal to both operations.

But would Hawkins and Dubinsky come back? A lot has happened since they quit Palm. Back then, the company was a 3Com subsidiary, tightly focused on the high end of the market, and the duo decided their vision of a mass-market consumer PDA could only be realised outside of 3Com. So off they went and formed Handspring.

Since then, Palm has split completely from 3Com and forayed into the very consumer market that Hawkins and Dubinsky quit to pursue. In short, the key reason for leaving Palm in the first place is no longer an issue.

Handspring, meanwhile, would like to get its hands on Palm's share of the high-end PDA business, something it has largely failed to manage itself. It clearly wants to expand beyond the consumer market, where it's coming under increased pressure from Sony's better-branded PDAs. And Nokia isn't going to allow Handspring to muscle in on a market it controls.

Handspring swallows Palm

So, a merger would appeal to Palm and would have something to offer Handspring's founders. But it would make particular sense if it amounted to a sale of Palm's hardware operation to Handspring. Palm's decision to split into two was certainly financially advantageous when first planned - two IPOs for the price of one - but that's perhaps less of an issue now. More important, in these days of aggressive competition from PocketPC, is to show that Palm doesn't want to compete with its own licensees. Separating OS from hardware goes someway to do that, but what better way than to remove either element out of the picture altogether?

The OS operation has to stay independent or the problem remains, but selling the hardware division to Handspring - or any other licensee, for that matter - would solve it totally.

As we say, even if the companies are talking, it's too soon to be sure of a merger of any kind. Mergers can easily deflect senior executives from the task of managing a company's immediate problems, and Palm may well want to focus on successfully spinning off its OS operation before considering what to do with what's left of the company.

Equally, Handspring's chiefs may be more keen on gearing up for the debut of the Treo line than talking about possible merger scenarios with Palm.

What we can say, however, is that there are some clear strategic advantages for both companies with such a move. After all, it worked for Steve Jobs. ®

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