Friday, April 16, 2010

Palm (NASDAQ:PALM): See takeout value around $10-14/sh - RBC Capital

RBC Capital is out with an interesting call on Palm (NASDAQ:PALM) saying that if acquired, they believe webOS may command a greater 'strategic premium' than generally appreciated. They see takeout value at a whopping $10-14/sh range.

'Perfect Storm'. If acquired, webOS may command a healthy strategic premium, given a 'perfect storm' of factors: 1) the frenetic 'land grab' in the huge, nascent Smartphone market; 2) rising Smartphone competitive intensity, with too many Apple/Google contenders; 3) the realization owning great software is key to leadership; and 4) carrier, OEM fear over Apple/Google's growing power and threat of repricing down their businesses (Google Voice, iTunes, Nexus, etc.).

Strategic Premium. Palm's challenges have been scale/awareness – not webOS, which is still labeled elegant and revolutionary. Potential acquirers may look beyond Palm's struggling hardware business and capital structure (debt, converts), and see a rare opportunity to acquire a modern Smartphone OS, unique R&D team and budding developer ecosystem. $2-3B may seem cheap, when factoring in growing threats to an acquirer's legacy business (e.g., multi-billion dollar handset/PC sales). Acquirers may also value carrier support for WebOS, which carriers hope will stand up to Android/iPhone when married to a partner with scale/resources. webOS is also scalable (e.g., to netbooks, tablets) and leverages the cloud and Web Standards, expanding its addressability to other hot markets.

$10–14/sh Possible. Palm trades at 1.0x EV/S; precedent transactions (MSFT/ Danger, NOK/ Symbian, etc.) range from 2.3-9x EV/S. Using sum-of-parts, RBC estimates takeout could be $10-14/sh (1.4-1.9x EV/S). The firm has ranked potential acquirers by strategic need and fit:

Strategic Fit: Acquirer urgency/priority to lead in Smartphones and compete with Apple, Google, etc.; fit with existing businesses, customer bases, platforms, geographies, technologies (e.g., OS/platforms), distribution (carrier) fit, market positioning fit.

Execution Fit: integration risk, cultural fit, synergies, organizational integration, potential to preserve Palm autonomy (key employee retention), other integration risks, ability to manage channel conflict, etc

Hewlett-Packard - RBC's best case acquirer:
$14B cash on hand
- Attracted to Smartphone market both offensive and defensive (protect PC business).
- Opportunity to embed webOS into a variety of computing products.
- Allows differentiated smartphone strategy vs prior Smartphone offerings (Windows Mobile).
- Could preserve Palm autonomy (Palm becomes Smartphone division).
- Lower integration risk (both located in California, former Palm CEO runs HP's Personal Systems Group).

Acquirer Anxiety. Palm is facing rising pressure to capitalize on webOS's potential, before its challenges overwhelm it. However, with 2 years of cash, RBC doesn't foresee imminent bankruptcy. And they believe possible acquirers also feel intensifying pressure to capture a leading OS before the market gets 'sewn up' by Apple/Google - or risk losing webOS to a competitor.

Positive Risk/Reward. RBC's scenario analysis suggests positive risk/reward: 1) acquisition (60% probability) = $10-14/sh; 2) turnaround (30%) = our $11/sh target; and 3) no buyer materializes (15%) and Palm either stabilizes or deteriorates (shares could return to ~$4/sh at distressed 0.6x EV/S multiple, possibly lower).

Notablecalls: RBC's Mike Abramsky is making another bold call on Palm here. The rest of the analyst community seem to be thinking $6-7/sh is the best the co can fetch under a takeover scenario. While Abramsky has been utterly wrong about Palm in the past, I think the call will generate some buy interest in the name in the n-t.

I found it very interesting to see that Harbinger Capital, a hedge fund specializing in event/distressed strategies, had taken a sizable 9.48% stake in Palm. Falcone is known for his bold bets.

Some Palm watchers have suggested to me Elevation Partners, that controls around 30% has a cost basis of about $5.41 (facoring in the convertible preferred shares). So that is likely the starting point of price negotiations, I would think.

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