BW: Palm Grasps Handspring's Importance

This merger could be a winner, giving Palm a powerful entry into the smart-phone business. Trouble is, the handheld market is maturing rapidly

When Palm announced on June 4 it will buy rival Handspring, few in the industry were all that surprised. Both outfits were handheld pioneers. Together, their electronic data organizers have freed literally millions of consumers from pockets stuffed with slips of paper and jotted to-do lists. Lately, though, both companies have fallen on hard times and risked becoming also-rans in a market now crowded with the likes of Sony , Samsung, Hewlett-Packard , and Dell . The pairing, currently valued at about $170 million, is aimed at shoring up the Palm hardware group's precarious position against an onslaught of rivals.

Will it work? It sure can't hurt. Consider that Palm controlled nearly 100% of the handheld market 10 years ago, vs. just 36% today, according to researcher IDC. Handspring brings an additional 5.8% of the worldwide handheld market to the table. The two are easily better off together than each would be alone.

Handspring's total capitalization was once $9 billion, but without the merger it faced likely bankruptcy within months, a victim of a poorly timed product transition and slower-than-expected market growth.

COOLING TREND. And Palm is only now recovering from its own series of disastrous missteps. Under new management, Palm in the past eight months has turned out several well-received handhelds, including the Zire consumer PDA and the higher-end Tungsten C. At an affordable $99, the glitzy white Zire has sold more than 1 million units in just six months. "We've turned the corner," Palm Solutions CEO Todd Bradley says.

Maybe so, but plenty of challenges are ahead. The biggest may be that handhelds, once one of the hottest gizmos in techdom, are now maturing. IDC expects the overall market for data-centric handhelds like the Zire and Tungsten lines to grow less than 1% this year. That's even as big-name players like Dell flood the market with $199 handhelds, bruising margins for everyone.

Worse, despite beefing up its portfolio, Palm continues to have a tough time convincing corporate buyers that it represents a better choice over handhelds using Microsoft's Pocket PC operating system.

ESTABLISHED CONNECTIONS. Acquiring Handspring could mitigate those factors. Last year, it was the No. 3 seller of so-called smartphones, behind Nokia and Motorola. Those devices combine handheld organizers and cell phones into one package and represent where the handheld market is expected to see the most growth. IDC analyst Kevin Burden predicts 13.1 million units will sell this year, up 260% from 3.6 million last year.

Palm had been working on its own smartphone, but Handspring is just weeks away from rolling out its second-generation Treo communicator. What's more, Handspring has spent a grueling two years building key relationships with Sprint and other wireless carriers, whereas Palm would have been a newcomer to the notoriously difficult communications market.

Handspring, then, may be just the secret sauce Palm needs. Certainly, the combination will shore up the balance sheet. Palm Chief Financial Officer Judy Bruner says the company can save $25 million annually, in part through layoffs and consolidated procurement of parts, after the deal closes later this year.

CHANGE PARTNERS. The return of Jeff Hawkins, creator of the original Palm Pilot, as chief technology officer also is a plus. He designed the Palm V, which helped ignite the handheld craze. And the Zire has proven good designs can still be a hit at retail.

Until Palm comes up with the right strategy for breaking into the corporate market, however, it will remain the underdog of the industry. Bulk sales to corporations, and the service contracts that come with those sales, are the key to boosting profits in a commodity industry.

CEO Bradley says he's building one of the strongest pure-play handheld companies in the world. True enough, but those words hardly instill confidence when you consider that Palm -- with a mere $1 billion in revenues -- will still be competing with the likes of Nokia, Sony, and other deep-pocket players in the communications and handheld markets.

As Palm moves to spin off its more successful operating-system group later this year, the hardware company must dance harder and faster to avoid becoming another fallen Silicon Valley icon. At least now it has a sprightly partner with Handspring.

By Cliff Edwards

Bragt på netposten.dk med tilladelse fra Business Week (C)