Calls of Note Part 1

Bear Stearns out with an interesting note on Palm (NASDAQ:PALM), saying that in light of news reports that PALM mgmt has hired investment bankers to "explore options," they wanted to highlight an important valuation issue: net operating loss (NOLs) carryforwards, because the actual realizable amount -- around $1.00-$1.10/share -- is less than some investors may expect.

According to PALM's latest 10Q, the company has NOLs of ~$609mm on 104mm shares. However, this translates to ~$1/share since NOLs will be subject to IRS limitations if PALM is acquired.

Specifically, IRS limits the use of acquired company's NOLs to a long-term tax exempt rate (4.18% as of 3/07) of the equity value per year at the time of the acquisition for up to 20 years --e.g., at hypothetical acquisition price of $17/share for PALM, annual limit on NOLs is $74mm (i.e., equity value of $1.77bn * 4.18%).

In addition, NOLs from a prior acquisition (i.e., Handspring's $273mm), must adhere to the IRS limitation specified at the time of acquisition (10/03) --i.e., $9mm/year based on equity value of $188mm.

Notablecalls: Bear Stearns is late with this note as PALM already gave up all of the Friday's gains yesterday. However, this goes to the very good to know category should the takeover speculations resurface.