Wednesday, September 23, 2009

Palm (NASDAQ:PALM): Bidding war to emerge for Palm? Jefferies sees 80% premium

Jefferies is out with an interesting call on Palm (NASDAQ:PALM) saying we could see a bidding war for Palm, could garner c.80% premium. Nokia (NYSE:NOK) mentioned as the main bidder.

Strategic rationale: WebOS as carrot - Palm gives buyer a PC-class OS (WebOS; Linux-based, multi-tasking) and a US-centric high-end handset (Palm Pre) that best mimics iPhone experience (UI) - courtesy of senior Apple staff defections to Palm. Nokia can't compete in US (c.6% m/share) or high-end with Symbian but with another OS (would make 4, or 5 incl MSFT in Noia Netbook) 3rd Party application development is confused to say the least. Palm would have to be run as a separate business near term; 'parallel' roadmaps may take 1yr+ to converge; it could be 2011 before we see a fully integrated WebOS and Ovi services platform in a new form
factor device (tablet?). Meantime, Symbian remains Nokia's workhorse for roadmap designs before being restricted to mid-tier as WebOS supplants in high end.

PC OEMs may create a bidding war - Palm is an opportunity for OEM "escape" from the graying PC market (Dell, Toshiba, Asus, Acer). This could see a bidding war for Palm – Jefferies sees a hefty premium to Palm's current m/cap ($2.4bn; EV $2.2bn). It's much cheaper than Apple (FY'10 1.2-1.3x EV/sales vs. c.3x) but counterbids could see valuations soar; a 3x EV/sales bid would mean $4.3bn or a c.80% premium to current price. Ignoring synergies and assuming 2m handsets/qtr at $250 each and 15% op% they think it may take over 14 years to breakeven on this deal. But the strategic merits would outweigh - this could arguably leave Nokia only 1yr rather than 2-3yrs behind Apple's software development and high end UI, helping retain Nokia's global market share lead (2Q09e c.38%) just as Apple enters China. Palm is already looking to raise cash (pro forma net cash c.$200m after raising $325m) which means a capital injection may not be needed from any acquirer. Add in R&D savings (Nokia spent €3.1bn on device R&D in '08, much of this on solutions and services) and payback shortens. Nokia has €3.2bn net cash.

Taking tablets - With Apple rumoured to launch a 10" screen tablet, MSFT steals its thunder with a prototype two-screen tablet. The mobile computing form factors are fast developing in Nokia's absence. Nokia's proposed tie-up with Intel does not square nicely with a Palm acquisition. An Intel pairing would, in Jefferie's view, likely see new devices on a Linux OS (Nokia's Maemo with Moblin flavours) on top of say Intel's "Medfield" processor sometime in 2011 with volume ramp in 2012 (Apple tablet 4Q09?). However, Nokia could force Maemo onto its own new form factor next year. Yet, little past evidence exists of genuine design innovation at Nokia.

Notablecalls: Selling out would be the only sensible thing to do in Palm's case. They are up against players that are way better capitalized and able to bring new products to market at speeds way greater than Palm. How long did it take for the Pre to reach the shelves?

Nokia is desperate and has the cash. Why not give it a go?

PS: PALM offering priced this morning.

PPS: Not making a call here. The offering was priced at $16.25/share. Absent an offering I would have been all over this one.

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