Palm ist wieder da

By Eric Jhonsa
April 15, 2010 

PALM

Palm, Inc.

$5.40 $0.08 (1.50%)

More about PALM

While two Wall Street analysts have decided that Palm's   (Nasdaq: PALM) shares are  worth as much as a limited-edition Tyler Green rookie card (which is to  say, nothing), one big hedge fund has a very different opinion. Maybe  this fund knows something about Palm's future that the rest of us don't,  but it's also possible that it just understands a fact that many other  investors are also aware of: Palm can still be pretty valuable in the  right hands.

The news of Harbinger Capital's giant stake in Palm, which stood at  9.48% at the end of March, comes when Wall Street's sentiment toward the  company has turned deeply negative. Not only have Morgan Joseph &  Co's. Ilya Grozovsky and Canaccord Adams' Peter Misek given Palm a  price target of $0, but only two of the 28 analysts covering the  company (according to Thomson/First Call) rate its shares a buy. If I  thought Palm would continue trying to slug it out in a fiercely  competitive smartphone market, I might agree with the pessimists. But  since the company has already hired Goldman Sachs to  help it find a buyer, it looks as if Palm has resigned itself to being  another storied tech pioneer that couldn't stay independent anymore. And  in that context, I think the company is anything but worthless.

I think the best historical comparison here is IBM's   (NYSE: IBM) 2005 sale  of its PC division to China's Lenovo Group for  $1.75 billion. Like Palm, IBM's PC division was both bleeding cash and  losing market share to hungry competitors, a situation that led some to  think the business couldn't be sold. But also like Palm, the unit had  smart engineers, some well-known brands, a strong patent portfolio, and a  decent North American presence. Put into the hands of a low-cost Asian  manufacturer such as Lenovo, those assets ended up being pretty  valuable: Gartner estimated that Lenovo's global PC market share stood  at 8.3% in the first quarter, up from 6.6% a year before, and good for  fourth place overall.

  Why HTC needs to act  
So which company can play the role of Lenovo for Palm? Like my  colleague Rich Smith, I'm skeptical that it'll be Lenovo  itself. But I think either Huawei Technologies or HTC  could work. Both companies have been rumored to covet Palm, have the  cash to pull off an acquisition, and could quickly bring down the  company's manufacturing costs. But while Huawei could benefit from  buying Palm -- especially if it gets Palm's engineers working on some  good Google  (Nasdaq: GOOG) Android phones  -- HTC simply needs to make a deal happen, for a few reasons:

• HTC's smartphone lineup gets an immediate branding boost. To put  it mildly, HTC's brand power isn't at the same level as that of Apple   (Nasdaq: AAPL) or a Nokia   (NYSE: NOK). Perhaps Palm's  brand isn't, either, but the company's legacy does give it some  additional value.
• Palm's technology could be ported to HTC's existing phones. HTC  has had some success in differentiating its Android and Windows Mobile  phones from the pack through its Sense user interface. But integrating some  of the neat features in Palm's webOS operating system, such as its  live application previews and cascading notifications, would take the  company much further.
• Apple, Apple, Apple. There's a big reason Steve Jobs chose to send  his lawyers after HTC instead of, say, Motorola  (NYSE: MOT) or Samsung:  Those companies could probably sue Apple for patent infringement as  easily as Apple could sue them. With Palm's patents in the picture, Jobs  might have a weaker hand against HTC going forward.

Palm's hopes for reliving its glory days as a smartphone leader may  be shattered, but this doesn't mean a company such as HTC won't assign  it a price tag well north of $0. I'm guessing that Harbinger Capital is  well aware of that.