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In Motorola vs Palmsource, who catches the OS?

We think Palm wants its baby home

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Motorola was pipped at the post with its bid to acquire PalmSource, and isn't happy. It's suing the software company and seeking a termination fee.

PalmSource announced it was being acquired by Japanese browser company Access for $324m on September 9 this year, or $18.50.

In late September PalmSource disclosed it was the subject of a lawsuit from a jilted bidder, called 'Company A'. We now know that's Motorola - the Chicago Sun Times being first into print with the news.

The suit describes how Motorola approached PalmSource in the late spring, with a view to a collaboration. As did Access. A third company - believed to be Palm - bid $13 in cash and stock, before dropping out. Bidding continued throughout the first week of September, and Motorola thought it had won with a bid of $17.25 per share. When Access returned with what proved to be the winning bid, Motorola didn't increase its offer. However it does maintain that a contract was sealed, and PalmSource's failure to pay $8.6m due by September 16 is a breach of contract.

Why did Moto want Palm software?

It's not for PalmOS, in its present or future incarnations, we're assured.

In early 2003 Motorola announced it was investing heavily in China and Linux. Late last year, PalmSource announced it was picking up China MobileSoft (CMS). CMS has an embedded OS, but its main business comes from selling phone applications: when we spoke to PalmSource in February, CMS had ten OEMs for these applications.

But Palm undertook another, little publicized strategy shift in the spring which led to the ouster of CEO David Nagel, and signaled the end of its role as an OS shop with an OEM operation and a consumer brand.

That shift meant PalmSource would focus on selling Linux phone applications to lower tier phone vendors. In China, that's big business, but doesn't need consumer savvy marketing - or much of an OS team.

Both Motorola and Access wanted CMS' China presence - but have mixed feelings about maintaining an OS. Having dipped into every platform camp over the years, Motorola emphatically doesn't need another OS. Access is said to be ambivalent.

Palm uses PalmOS Garnet in its hit Treo smartphone and all its established PDA handhelds. Palm can continue to use PalmOS in its products for another four years, and a published royalty schedule guarantees Access a fixed income for each year - and Palm hopes, a commitment to continue development of the OS. With a much publicized Windows product just announced, it's a delicate time for Palm to announce its intentions to get PalmOS back under the roof.

But it wants to, it has little to lose with the PalmOS OEM business drying up, and has much to gain from making a bid for the OS. Sooner or later, we reckon the much-traveled OS will be back at home.®

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