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Dell buy of Palm would make sense, say analysts

With Palm Pre due soon, Dell could dive into the smartphone market

March 23, 2009 12:00 PM ET

Computerworld - Whether a deal by Dell Inc. to purchase Palm Inc. is truly in the offing, an acquisition would make sense for both companies, three analysts said today.

However, at least one additional analyst said the time has already passed for such a deal, which was first rumored at least two years ago.

Neither company could be reached to comment regarding a recent Dow Jones report that summarized many of the market conditions making a merger likely. The report included comments by Shaw Wu, a financial analyst at Kaufman Brothers LP, who said Palm could be the target that would allow Dell to get into the smartphone market.

Financial strategy consultant Sramana Mitra also recently laid out factors that favor such a marriage, noting that Palm needs to take on Apple Inc., maker of the iPhone. "Palm cannot take on Apple on its own, and a Palm-Dell union would change the equation dramatically," she wrote on the financial news site Seeking Alpha.

The scenario makes sense because of a number of factors, three industry analysts said in interviews. One factor, they said, is that Dell will be seeking to diversify as it sees its server business come under attack by new server entrant Cisco Systems Inc., which announced its Unified Computing System last Monday, and a potential merger of IBM and Sun Microsystems Inc..

Another is that Dell has plenty of cash on hand, more than $9 billion, while Palm recently reported a dismal third fiscal quarter, with revenues down by 71% from the prior year. Palm has staked its future on the Palm Pre, which runs the new WebOS, and might need Dell's money to help get that device shipping quickly, analysts said.

"Palm is vulnerable, and Dell has cash," said Yankee Group Research Inc. analyst Carl Howe. "A merger sounds like a good idea."

Kevin Burden, an analyst at ABI Research Inc., said he first studied rumors that Dell might buy Palm two years ago. "Dell buying Palm still makes a lot of sense," he said, since, compared with vendors such as Hewlett-Packard Co., "Dell stands to benefit the most by acquiring it,"

Burden said if the Pre takes off, Palm would not need a partner like Dell, but he added, "it depends how fast they get that Pre out."

As it stands, the Pre's success is tied to the fortunes of Sprint Nextel Inc., the exclusive carrier of the Pre. And given Sprint's lackluster financial prospects, the Pre could be affected, Burden said. Sprint has said the Pre will launch in the first half of the year.

"If Sprint doesn't perform the way Palm needs it to perform, that could kill the momentum Palm wants to build," Burden said.

Dell has been rumored to be interested in Palm for at least two years, going back to when Dell stopped selling the Axim handheld device.

Jack Gold, an analyst at J.Gold Associates LLC, said two years ago that Dell might buy Palm, but he changed his tune in an interview today, saying "I think they have both missed the window of opportunity." It's more likely that Dell would buy an Asian handheld maker such as Asustek Computer Inc., Acer Inc. or HTC Corp, Gold said.

Read more about Mobile/Wireless in Computerworld's Mobile/Wireless Topic Center.

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