Reading the Deal: Palm and Handspring

Call it “The Sound of One Palm Clapping”, or “Palm and Handspring go Hand in Hand.”

Whatever you call it, when Palm said it would buy its rival Handspring this week, it marked a definite shift in the PDA-wireless convergence space. But analysts say it also shows that the two companies needed each other’s know-how to stay active in the ever changing mobile market.

The $169 million stock swap deal is expected to get close government scrutiny before it gets approved. Palm Solutions Group president and CEO Todd Bradley estimates the paperwork should be complete by this fall.

On paper, the deal looks straightforward. One market leader buys out a struggling competitor to add smartphone products like the Treo into its handheld lineup of business-class Tungsten and consumer friendly Zire.

But under the surface, there were concerns about both companies. Palm consistently retains its number one sales spot in the world for PDAs, but the latest stats from research firm IDC’s “Worldwide Handheld Qview,” suggest Palm’s global sales are nearly double the number of handhelds compared to its closest competitor, Hewlett-Packard, which makes the iPAQ. Other major players in this space include Sony and Dell Computer.

Handspring, on the other hand, had a technologically advanced product but was suffering from sluggish sales and a possible delisting from the Nasdaq.

Martin Reynolds, a technology analyst at Gartner said he didn’t think either company could be considered really strong on their own. Both needed something to get them in a better position going forward.

“One of the challenges Palm and Handspring had operating separately is that they were competing against each other and not building market share,” Reynolds said. “Now, they will be able to compete against Sony, which has been doing a great job with consumer lines. Plus, there is very little overlap between [Palm and Handspring’s] product lines.”

And adding the Treo line to its repertoire means Palm is now thrust into direct competition with smartphone makers Nokia, Motorola, Samsung, and Sony Ericsson.

“The important thing is that Palm has dominated the unwired handheld industry. It has been Palm’s for the taking. This new space — convergence space — is a whole new animal and this is not an industry that Palm will not come in and dominate because it has no heritage,” IDC senior analyst Alex Slawsby said.

One area where that is painfully obvious is in the European markets, which is a very phone-centric region. The competition for Palm there is not so much from other handhelds as it is from the phone market. This time last year, Palm saw a major dip in its Euro sales. Palm has since enlisted the help of Digital River.

“I think this is mostly a U.S. story for Palm,” Reynolds said.

But Slawsby added that Handspring still has time to win on some levels as the timeframe for the acquisition allows the company to continue developing its planned Treo 600 through the summer.

Like Palm Zire 71, the device has a built-in camera, high-resolution display, and a Secure Digital expansion slot.

Then there is the emotional return of Handspring CEO Donna Dubinsky and Jeff Hawkins, founding members of Palm, returning to their roots.

“A lot has changed since (they left Palm to launch Handspring),” Reynolds said. “The markets have changed a lot. The company (Palm) has changed a lot. Anything about past disagreements is water under the bridge. The new company has a lot of great talent at its disposal, and talent tends to stay where it has something to do.”

The two companies have actually been working together to shore up their assets. Back in August 2002, a U.S. District Court in Delaware cleared the two handheld makers of accusations by Dayton, Ohio-based NCR Corp. of violating two patents relating to data entry and synchronization on handheld devices.

Both Handspring and Palm have also settled their spat with BlackBerry maker Research In Motion by licensing its QWERTY keyboard technology.

The consolidation at this time may be very good timing for the new Palm if it can capitalize on new products in the next year. New stats published Thursday by analyst group IDC says 66 percent of the companies they talked to will buy more handheld devices this year than last purchasing an average of 5,659 devices in the next 12 months. The surveyed companies said their primary reason is that their mobile and remote workers work smarter and faster when they can access corporate information. Wireless and security spending are expected to increase in one-half of the organizations surveyed, averaging $1.7 million and $3.4 million respectively in the next 12 months.

Bottom line? Watch each company’s 320×320 space. Both have new deals with Orange SA, a London-based mobile operator and subsidiary of France Telecom (Quote, Company Info). That arrangement will have to be ironed out before the acquisition finalizes. Not to mention it could make things interesting for Orange’s relationship with Microsoft.

Palm said it is making every attempt to push into the enterprise and in the coming weeks, the company is expected to announce further partnerships with that underlying strategy.