Palm Action Heats Up

The bidding for handheld computer pioneer Palm Inc. is heating up, with Nokia Corp. (NYSE: NOK) and possibly a private equity firm emerging as the leading candidates to acquire the company, Unstrung has learned.

Sources close to Palm and investment bankers familiar with the deal say the bidding process is proceeding for the smartphone maker and that the company could be sold in the $20-per-share range.

Unstrung reported earlier this month that Palm is once again an acquisition target. Sources said then that a private equity firm could be one of the major bidders. Motorola Inc. (NYSE: MOT) was also named as potential buyer, but it now appears to be fading from the picture. A well-placed source suggests that a Motorola buyout is definitely not going to happen. Morgan Stanley is said to be shopping the firm around. (See Palm's in Play .)

A private equity buyout would follow a growing trend in the wireless business of these groups spending large sums to buy up technology assets. Last year Koninklijke Philips Electronics N.V. sold an 80.1 percent stake in its former semiconductor division to a group of private equity investors led by Kohlberg Kravis Roberts & Co. (KKR) for $5.58 billion.

Rumors about a Palm sell-off first gained serious momentum earlier this month when its shares rose in an unexpected growth spurt. Separately, a major hedge fund, Galleon Group LP , reported in a 13-G filing with the SEC that it had snapped up just over 6.3 million shares -- about 6.2 percent of the 102 million outstanding shares -- of Palm stock.

The company is said to be attracting attention from the buyout crowd because of its $500 million cash position and significant cash flows.

An industry source familiar with the company says that Palm has been weighing its options for a while. "They're at a crossroads," he says, asking to remain anonymous.

The company could choose to continue operating as a going concern and compete in the highly competitive wireless market against larger rivals such as Nokia, Motorola, and BlackBerry . This is said to be the favored option of some of the management team.

Some shareholders, however, are rumored to be pushing the company to examine a partial or complete buyout. This could involve an outside investor putting in a "significant infusion of cash" and installing a new management team, or it could mean a full takeover. "My sense is that they're eventually going to get out," the source says. "Simply because a lot of other companies are so far ahead innovation-wise."

This explains why a deal is ripe to occur now, while the company still maintains brand equity and a large installed base of handheld users.

Yesterday, Palm shares were trading flat at $15.92. Not bad, considering that the Nasdaq fell 96.65 points, or 3.9 percent, in one its worst trading days since September 2001.

— Dan Jones, Site Editor, Unstrung