ZDNet UK / News and Analysis / Business of IT / IT Strategy

Palm buys Handspring, spins off PalmSource

By John G.Spooner, CNET News, 4 June, 2003 12:30

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Stock, Buy, Purchase, Trade, Palm, Handspring, PalmSource, Acquisition

NEWS
Palm said on Wednesday it will buy rival Handspring for approximately $169m (£104m) in an effort to strengthen its grip on the market for handheld devices. The company has also finalised plans to spin off its PalmSource software division. The transaction will grant Handspring stockholders 0.09 of a share of Palm -- and no shares of PalmSource -- for each share of Handspring common stock. Based on Tuesday's closing price, that values each Handspring share at $1.09, slightly lower than Handspring's closing price of $1.11. The deal is expected to close this fall, after the spinoff of PalmSource. Palm Solutions Group, the company's hardware arm, will then merge operations with Handspring, creating a new hardware company with a new name. By adding Handspring's Treo hybrid cell phone/PDA to its own line of personal digital assistants, Palm believes it can create a much broader product line, thus giving it an advantage in a handheld market that is growing increasingly crowded. Some of the anticipated advantages will come from gaining access to Treo, to Handspring's technology generally and to the company's relationships with resellers and cellular service providers. At the same time, Palm will gain cost savings and bring back some of its former stars. Palm is the No. 1 seller of PDAs, but the company has been hit by slowing demand for handhelds and increased competition from new entrants, including Dell. PDA shipments were down 21 percent during the first quarter, according to IDC. Shipments have been slumping for the past few quarters. With the Handspring deal and the PalmSource spinoff, Palm is looking to bring back some of its old magic. "These two bold moves will serve as a powerful catalyst to transform the landscape of the handheld industry. The strategic choice of merging Handspring and the Palm Solutions Group of Palm will create the broadest portfolio and the most-experienced leadership team in the industry, fully capable of delivering value to customers, partners and shareholders," Eric Benhamou, Palm's chief executive, said in a statement. The deal also brings full circle the relationship between the two companies. Handspring founders Jeff Hawkins -- who invented the first Palm handheld -- and former chief executive Donna Dubinsky established Palm in 1992, and were the top names at the company until they left in 1998 to start Handspring. Handspring became one the first outside companies to license Palm's operating system. Hawkins and Dubinsky will become part of the new management of the combined company and are expected to help lead the company toward its new goals. With the PalmSource software operation running on its own, Palm -- now a hardware company -- will focus on bolstering its brand and its market share in the handheld market. In addition, the deal helps Palm bolster its defences against a Microsoft siege. Though Palm remains the leading seller of PDAs, products based on Microsoft's Windows CE operating system and the Pocket PC software, such as HP's iPaq, have been steadily gaining market share over the past few years. Microsoft has also launched software that extends Pocket PC to hybrids of PDAs and cellular phones. In the company that forms from the union of Handspring and the Palm Solutions Group, that group's chief executive, Todd Bradley, will become chief executive of the new company. Hawkins will be named chief technology officer, and Dubinsky will sit on the new company's board of directors. The new company will consist of two business units: Handheld Computing Solutions for marketing Palm PDAs, and Smartphone Solutions for marketing Treo and like products. Ken Wirt, Palm Solutions' senior vice president of sales and marketing, will run the handheld computing unit. Ed Colligan, Handspring's president, will run the Smartphone Solutions unit, Palm said in a statement. Palm expects the new company to see approximately $25m (£15.3m) in cost savings annually after the deal, a result of increased manufacturing volumes and the elimination of overlapping programs. Part of those savings will come from job cuts. Palm expects to reduce its overall work force by 125. The deal also marks the end of Handspring's struggles. The company's Visor PDA was once second in market share to its Palm counterpart. But Handspring had seen a string of quarterly losses as it tried to make a transition away from PDAs to focus only on the Treo.
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