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Palm bails out Handspring with merger deal

Palm founders rejoin old firm

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Palm is to acquire Handspring, the company set up when its two founders, Jeff Hawkins and Donna Dubinsky, decided to go it alone in 1998 following Palm's acquisition by 3Com.

The deal, announced today, follows final approval of Palm's board for the plan to spin off PalmSource. So as Palm waves goodbye to its operating system development wing, it's saying hello to a very experienced smartphone development team. Subject to shareholder and regulatory approval of course.

PalmSource will go first, allowing the remaining Palm Solutions Group to merge with Handspring. Handspring shareholders will be offered 0.09 Palm shares - no PalmSource stock, though - for each Handspring share. As a result of the merger, Handspring's shareholders will own approximately 32.2 per cent of the newly merged company on a fully diluted basis, and Palm's shareholders will own approximately 67.8 per cent.

The resulting company will contain two business units: handhelds and smartphones. The former will presumably continue to develop the Zire and Tungsten PDA brands under current PSG chief Todd Bradley, while the other unit will work on Treo, Handspring's smartphone, under Handspring's COO, Ed Colligan. Hawkins will become overall CTO of the merged operation. Dubinsky will stay on as a Palm board member.

Further down the employment ladder, some 125 people will lose their jobs in the merger, presumably from both Palm and Handspring.

It's not hard to see why the two have come together - a move that has been rumoured a number of times over the last few years. Handspring has been having a particularly tough time recently, achieving critical acclaim for its Treo line, but far fewer sales than its original Visor PDA product line achieved, leading to a corresponding collapse in its market share.

Indeed, the closer you look, the more this looks like a Handspring rescue bid. Say the companies: "As part of the merger agreement, Palm will provide an initial $10 million line of credit to Handspring for working-capital purposes until the transaction closes. Under certain conditions, the line of credit may increase to $20 million, and its maturity may be extended."

In other words, Palm is bailing Handspring out. It's providing enough cash to keep it afloat until the merger completes - in the autumn, if all goes to plan - and will cough up more if Handspring needs it. In short, without Palm money, Handspring's toast.

Palm itself has continued to lead the market, and has done very well launching Tungsten and Zire, particularly the latter. Handspring's products will give a new string to its bow. That said, Palm has always been vociferously opposed to the concept of the merged phone and PDA - it believes the two devices should be kept separate. It's hard to imagine it has really changed its mind. But at least Treo gives it a line of products not currently offered by its main PalmOS rival, Sony's Clie family. ®

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