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Sony Plans to Invest in Palm's OS Unit

Computers: $20-million deal gives the consumer electronics firm a 6% stake and boosts the hand-held maker's plan to spin off the division.


Sony Corp. on Tuesday agreed to invest $20 million in the Palm Inc. unit that makes the leading operating system for hand-held computers, boosting Palm's plans to split into two independent companies.

The deal gives Sony a 6% stake in PalmSource. The consumer electronics powerhouse is the first outside investor in the unit. Palm has been struggling amid lackluster demand for hand-helds, and Sony has a vested interest in sustaining the platform, which powers its line of Clie organizers.

For Milpitas, Calif.-based Palm, the relationship could bolster the audio and video capabilities of its operating system, which is under attack by Microsoft Corp.'s rival Pocket PC. Once the leader in hand-held organizers, Palm in the second quarter fell behind Hewlett-Packard Co., which uses Pocket PC.

"Sony has such a wonderful reputation for innovation, we could not have asked for a better partner or investor," PalmSource Chief Executive David Nagel said.

Sony has licensed Palm's operating system since 1999 and its Clie organizers have about 10% of the market. New Clie models record video, play music and browse the Internet with a wireless connection using Palm's latest software version, OS5.

PalmSource started seeking investors several months ago for its spinoff from Palm. Palm decided last year to split its hardware and operating systems businesses into independent companies to boost software sales to computer makers hesitant to license an operating system from a rival.

Sony's investment gives Palm more freedom to decide how it wants to conduct the spinoff, which it expects to complete early next year, Nagel said. Palm is leaning against an initial public offering because of the weak market.

The companies already have separated physically. PalmSource now operates from offices in Sunnyvale, Calif.

James Faucette, an analyst with Pacific Crest Securities in Portland, Ore., said the Sony investment was not unexpected. Faucette said the expanded collaboration would help Sony develop products that interact with each other. Faucette has a neutral stance on Palm and doesn't own any of its shares.

Palm software also powers Handspring, Samsung and Kyocera "smart phones," which combine features of mobile phones and personal digital assistants.

Palm last week said it plans a 1-for-20 reverse stock split as it prepared for the spinoff. The company's stock will begin trading Oct. 15 on a reverse-split basis.

Palm shares rose 6 cents to 67 cents on Nasdaq. The shares have fallen 61% over the last year. Sony's American depositary receipts rose $1.15 to $41.48 on the New York Stock Exchange.

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