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Palm Approves Merger, Spinoff

The Handspring deal forms one firm to sell PDAs, another to license their operating system.

October 29, 2003|Terril Yue Jones | Times Staff Writer

Palm Inc. shareholders on Tuesday approved a radical plan to revive the company that popularized personal digital assistants, agreeing to buy rival Handspring Inc. and split the resulting company in two.

PalmOne Inc. will make hand-held PDAs and try to stave off competition from two-way pagers, multi-function cellphones, wireless laptop computers and especially Pocket PCs, rival devices that run a version of Microsoft Corp.'s Windows operating system. PalmSource Inc. will develop the Palm operating system and aim to license it to a wider array of hardware makers.

The new companies will begin trading on Nasdaq today under the ticker symbols PLMO and PSRC.

Though analysts expect Milpitas, Calif.-based PalmOne to hold a slight lead in the PDA market for several more years, they note that Pocket PCs made by Hewlett-Packard Co., Dell Inc. and others have been steadily eroding Palm's market share.

Palm-based hand-helds will account for 54% of the worldwide PDA market this year, down from nearly 84% in 1999, according to IDC, a market research firm based in Framingham, Mass. Meanwhile, Pocket PC devices will mushroom to 28% of the market this year from about 10% in 1999.

PalmOne plans to fight back by rolling out new products such as wireless phones that have PDA capabilities. The Handspring acquisition will give the company a jump start, since its Treo line of PDA-cellphones has received high marks from analysts and reviewers.

"They really do need to get into the phone market," said Todd Kort, an analyst with Gartner Inc., a technology market research firm based in Stamford, Conn. If Palm ignored PDA-capable phones, such devices would eat away at Palm's market share, he said.

To be successful, PalmOne won't need to compete head-to-head with mobile phone giants such as Motorola Inc. and Nokia, said Alex Slawsby, an analyst with IDC. If PalmOne could carve out a profitable niche for itself, it could "grow more than enough to sustain the company," he said.

Meanwhile, PalmSource in Sunnyvale, Calif., will continue to license the Palm operating system to its biggest customers, PalmOne and Sony Corp. for PDAs and Samsung Electronics Co. and Kyocera Corp. for wireless phones. It also will seek to gain more clients among other phone and PDA makers, including companies in Europe and Asia that use foreign-language versions of the operating system.

As an independent company, it will be freer to sign licensing deals, Palm executives say. For instance, Kort said PalmSource could even try to get PalmOne competitor Dell to license the Palm OS for a future Dell-branded PDA.

The acquisition will bring Handspring Chairman Jeff Hawkins and Chief Executive Donna Dubinsky back to the company they co-founded in 1992. Their original Palm Pilot, which debuted in 1996, became a must-have gadget for tech-savvy executives and cutting-edge fashionistas.

Hawkins and Dubinsky left Milpitas-based Palm in 1998 because of differences with the company's then-owner, 3Com Corp., over taking Palm public. The pair then founded Handspring to broaden the capabilities of PDAs, but they were never able to overtake their former company.

Hawkins, who invented the first Palm Pilot, will become PalmOne's chief technology officer, and Dubinsky will join the board of directors. Neither will be involved in PalmSource.

"This new industry configuration enhances the ability of both companies to deliver value to customers, partners and stockholders," said Palm Chief Executive Eric Benhamou, who will serve as CEO of PalmOne.

The companies will need all the help they can get -- Palm lost $82 million in its 2002 fiscal year, while Mountain View, Calif.-based Handspring recorded $91.6 million worth of red ink.

Palm shareholders will receive one share of PalmOne and 0.31 share of PalmSource for each of their shares. Then, each Handspring share will be exchanged for 0.09 share of PalmOne, giving the deal a value of about $240 million.

Palm shares rose $1.64, or 6.4%, to close at $27.24 in Nasdaq trading. The stock has more than doubled since the Handspring deal was announced in June.

Associated Press was used in compiling this report.

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