Palm to Buy Handspring To Bolster Hardware Unit

Merged company expected to be stronger competitor against Microsoft, other rivals

Corporate users and analysts last week said Palm Inc.'s planned acquisition of handheld device rival Handspring Inc. should result in a combined company that's better able to compete with Microsoft Corp. and cell phone makers in the mobile markets.

Milpitas, Calif.-based Palm announced that it's buying Handspring in a stock-swap deal that's expected to be completed in the fall. Palm plans to combine its own hardware unit and Mountain View, Calif.-based Handspring under a new name that has yet to be chosen. The merger will coincide with the previously announced spin-off of Palm's operating system division into a separate company.

Gail Browder, executive vice president for products and services at PHT Corp. in Charlestown, Mass., said the Palm/Handspring combination will produce a bigger, more competitive company. PHT has deployed "tens of thousands" of Palm devices over the past 12 months to support clinical trials it runs for drug companies, she said.

In particular, Browder noted that Handspring will offer Palm expertise in building handhelds with integrated wireless capabilities, which she sees as an essential feature. She also said that bringing back Jeff Hawkins, who co-founded Palm before leaving to help hatch Handspring in 1998, will help Palm "stem the perception of brain drain" that still lingers from his departure.

Palm said Hawkins, who is now Handspring's chairman and chief product officer, will become chief technology officer at the merged company. The company will be run by Todd Bradley, currently president and CEO of the Palm Solutions Group hardware unit.

Extending Its Reach

Sam Bhavnani, an analyst at ARS Inc. in La Jolla, Calif., said Handspring will provide Palm with something it has sorely lacked: strong partnerships with major U.S. cellular carriers. Bhavnani said Handspring has partnerships to sell its Treo smart phones through three cellular carriers: Cingular Wireless, Sprint PCS Group and the T-Mobile division of Deutsche Telekom AG. Palm, in contrast, has a sales and marketing deal with only AT&T Wireless Services Inc.

Dan Wilkinsky, a spokesman for Overland Park, Kan.-based Sprint, described Treo "as a real winner for us." Partnerships with handheld device makers are "absolutely vital" in order to ensure that the products they develop are "integrally woven" into the strategic plan of a carrier like Sprint PCS, Wilkinsky said.

The planned merger was almost inevitable because of the tough market for handhelds in recent months, said Phil Redman, an analyst at Gartner Inc. Handspring was particularly affected by the sales slowdown because Treo hasn't "really reached a wide enough audience," he said. "When there's such a small market overall, it's very difficult for small vendors to compete."

But Redman warned that bringing all the Handspring and Palm hardware executives together at one company could lead to "contrasting visions and disagreements at the top." Such problems led Hawkins and two other executives to form Handspring in the first place, he said.

Reporter Todd R. Weiss contributed to this story.


Handheld Combination

Latest financial results:

Palm lost $172.3 million on revenue of $209.0 million in its third quarter, ended Feb. 28; Handspring lost $90.4 million on revenue of $30.8 million in its third quarter, ended March 29

Expected cost savings:

$25 million annually, following a planned layoff of 125 workers and the elimination of overlapping programs and unneeded facilities

Planned board makeup:

seven directors from Palm and three from Handspring, with current Palm CEO Eric Benhamou serving as chairman

Copyright © 2003 IDG Communications, Inc.

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