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I’m Betting On A Palm Take Under Or Bankruptcy Here Is Why

 April 13, 2010 11:58 AM

Palm (PALM) buyout talk has been the buzz since their dismal earnings report on March 19.  Yesterday, it reach a feverish pitch after Bloomberg News reported that the company has engaged Goldman Sachs and Frank Quattrone's Qatalyst Partners to find a buyer.  Its stock price is up 50% over the last five days as investors get positioned for their big payday.  I'm taking the other side and betting on a take under or bankruptcy.  Here is why.

First of all, let's take some potential pursuers names off the table.  Microsoft, Nokia, Motorola, Research in Motion (RIMM) won't happen.  Of those four, Motorola (MOT) would make the most sense.  However, Motorola has invested significant time and resources into Google's Android.  That strategy is looking very questionable now with the release of Google's own branded phone (Nexus One).  Motorola's phone will always be a step behind Google's phone as demonstrated at the Nexus One launch – when the Nexus One was running a newer version of the OS.

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Nokia has little presence in the US, so Palm would help there.  However, Nokia already has two operating systems.  Would they want a third?  On 3/31,  at Research in Motion's earnings  call their CEO said that analyst would be "blown away" with their new road map to be discussed at the end of April.  Getting involved with Palm buyout talks would call into question their road map and send the stock to the woodshed in a nanosecond.  Microsoft is fully committed to Windows Phone Mobile 7, so they are out.

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So, who does that leave?  The names circulating yesterday were HTC, Lenovo, and Cisco.  Last night a report by Reuters, threw  two Chinese equipment makers into the mix – Huawei and ZTE (Huawei Approached by Palm).  From the report,

"Huawei and ZTE are potential buyers. It makes sense: they don't have an operating system or a brand, but they have cheap manufacturing costs and money to invest and develop the brand," said IDC analyst Francisco Jeronimo in London.

"Consumers don't associate Chinese brands with quality products and don't pay a premium for such a mobile phone … Palm would be perfect for them." ZTE, China's No.2 telecoms equipment maker, could not be reached for comment.

As far as I am concerned the last statement, ""Consumers don't associate Chinese brands with quality products" eliminated Huawei, ZTE and Lenovo.  Whether that statement is true or not can be debated.  However, in a technology company buyout, especially software, the most important asset walks out of the door everyday (the employees).  If Palm employees believe that they will be involved in a "non-premium" product they will walk.

In my opinion, that only leaves a few candidates – Cisco, Dell and HP.  Dell and HP are war proven veterans from the PC battles.  They made their bones with a third party OS.  Do they really want to bring it in house?

So, my last company standing is Cisco.  On yesterday, I thought a Cisco buyout was a crazy idea and still kinda do.  However, it may be Palm's only option.  Cisco provides the allure of working on premium products.  Both are West Coast companies, so cultures will be somewhat similar.  However, this ain't John Chambers first rodeo.  Forget about a buyout premium. Palm's average share price over the last 30 days is less than $5 and without the buyout speculation it would be even lower.

If Chambers bails Palm out it will be a take under.  If not Cisco – cancel Christmas.



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