Thursday, March 22, 2007

Calls of Note Part 1

Two notes out today dismissing Palm's (NASDAQ:PALM) status as takeover candidate following Motorola's (NYSE:MOT) warning.

- Merrill Lynch says Motorola's 1Q07 warning and accelerated share-buyback makes it an unlikely bidder for Palm, in their opinion. While they have been consistently skeptical of a Palm takeout, Motorola could have been the most likely bidder given the pre-existing relationship/synergies between Palm's Treo smartphone and Motorola's Good Technology (push email system) acquisition. However, firm believes Motorola's organic challenges, and presence of an activist shareholder (Carl Icahn), make it less likely for the company to chase Palm at this stage.

In addition to Motorola, Nokia has been cited in media reports as another possible strategic bidder for Palm. However, firm thinks Palm will be a poor fit for Nokia and a potential Nokia-Palm combination could introduce several integration challenges for Nokia. Palm traditionally focuses on the US market with high exposure to CDMA carriers and dependence on Palm/Microsoft operating system, while Nokia focuses on the non-US GSM/WCDMA markets using the Symbian operating system.

Palm's large cash balance (~27% of current market cap) has also raised the possibility of a private equity bid/LBO. However, the uncertain cash flows related to the hit or miss nature of Palm's products make a private equity takeout questionable, in firm's opinion. While Palm does have a loyal user base, firm's store checks point to market share shifts in favor of Palm rivals, RIM (Blackberry) and Samsung (Blackjack), that have recently launched several thinner and cheaper smartphones, compared to the Palm Treo. The expected entry of the Apple's iPhone is another competitive risk.

- JP Morgan says speculation that MOT is about to acquire PALM may be misplaced. In their mind, this raises further doubts regarding the entire speculative bubble that developed in recent weeks regarding a potential sale of PALM to strategic or private equity investors.

Nokia still doesn't make sense to them. Nokia could step in as a potential acquirer, but lacking the Good Technology back-end (owned by Motorola) to a Treo-based solution, it would seem a highly risky approach to trying to win enterprise business. Intellisync doesn't come close to either Blackberry or GoodLink, in firm's view. They remain skeptical.

Notablecalls: PALM traded down a bit in the afterhours yesterday, but I believe there is further downside to the stock. Anything above $19 should be good for shorting. Given Nokia's track record of acquisitions so far (small acquisitions for technology), I really don't see them buying Palm.

1 comment:

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