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Management & Trends Palm, Handspring Should Merge Lisa DiCarlo,, 06.08.01, 1:30 PM ET

NEW YORK – If Palm and Handspring have any hopes of maintaining the handheld platform’s dominant market share and opening new markets, they should swallow a little bit of pride and merge. It’s the best way to capitalize on their respective strengths.

Both companies are hurting. On Thursday, Handspring (nasdaq: HAND – news – people) said it would miss fiscal fourth-quarter revenue targets by more than 50%. Chief Executive Donna Dubinsky cited price pressure from Palm (nasdaq: PALM – news – people) and new product introductions coming from Japan’s Sony (nyse: SNE – news – people). That came a few weeks after Palm said its fiscal fourth-quarter sales would be half of expectations, and that its pro forma operating loss would be twice as big as it had earlier predicted.

First, consider the increasing competitive pressures. After a few false starts, Microsoft (nasdaq: MSFT – news – people) has finally gotten it right with its PocketPC platform, which rivals Palm’s operating system (OS). Several big PC makers, including Compaq Computer (nyse: CPQ – news – people), sell PocketPC-based personal digital assistants (PDA) and have made inroads into Palm’s market. Domestically, the Palm platform lost four market share points in the last 12 months to 79%, while PocketPC gained a few points to 12%, according to International Data Corp.

IDC analysts say that Palm will lose more market share in 2002, citing the better opportunity for PocketPC to make inroads to large corporate customers.

Now consider the synergies between Palm and Handspring. Palm’s primary function is software development and licensing. PalmPilots were the first successful handhelds because the software was simple to use. Palm continues to sign up software developers to write applications for the platform, as well as computer companies to bundle it with their devices. On June 1, it signed on Taiwan’s Acer, which will build devices for the Taiwanese and Chinese markets.

Handspring is a licensee of Palm’s OS, but most of its innovation has been in the device itself. Its Springboard modules plug into the Visor handheld, transforming the PDA into, among other things, an MP3 player, cellular phone or global positioning system. The beauty of it is that users don’t have to add any software or reconfigure the device.

If they did merge–and there has been no speculation that they will–one piece of the company would focus on software development and global licensing of the platform; the other would develop and sell devices with unique features à la Springboard. The combination of resources would blunt Microsoft’s growing piece of the handheld pie, give it better economies of scale and, with nearly $2 billion in sales, could give it the clout to penetrate large enterprise accounts.

Palm is the larger company by a factor of almost three, in terms of sales. As of March, it had $595 million in cash and equivalents, compared to $107 million for Handspring. Shares of both companies have been pounded, with Handspring and Palm down 61% and 78% respectively, from year-ago levels.

There is value in what both companies bring to the market, but it won’t be fully realized if they continue independently.