Palm Inc.’s planned acquisition of Extended Systems, a provider of mobile information management solutions, hit a bit of a snag after Palm’s stock price plummeted last week to less than $7 per share.
The sell-off began after Palm issued a warning concerning earnings, noting revenue would fall to less than $315 million for the first quarter compared with $572 million in revenue predicted by analysts. The company’s stock plummeted on the news, falling from $15 per share to less than $10 per share. The stock was trading above $20 per share when the deal with Extended Systems was announced in early March.
Extended Systems’ stock followed Palm’s lead, losing more than half of its value since the deal was announced, trading near $8 per share last week. Brokerage firm Stephens Inc. dropped its rating on Extended Systems from Market Outperform to Sell, but noted the deal would likely make it despite its low valuation.
The deal originally called for Extended Systems’ stockholders to receive shares of Palm valued at $22 per Extended Systems share, with a total value of $264 million. But, a collar in the agreement calls for Extended Systems’ shareholders to receive 1.325 Palm shares for each Extended System share if Palm’s stock price averages less than $16.60 per share for the 10 trading days leading up to the Extended Systems’ stockholders’ meeting scheduled for late May. At Palm’s current trading price, the deal is now valued at just over $111 million.
Extended Systems reported $13.9 million in revenue for the quarter ended Dec. 31, with a net loss of $1.6 million or 15 cents per share.
Many analysts, who liked the deal when it was announced last month, have continued to support the acquisition even at its reduced price.
“You have to look at what the alternatives are,” Rich Valera, an analyst at Needham & Co., told CNET News.com. “It’s not clear that Extended’s stock would rally if the deal fell through.”
Extended Systems said it was still confident the deal would be approved by its shareholders.
“From a stockholders perspective I am sure there is some concern,” said Steve Simpson, president and chief executive officer of Boise, Idaho-based Extended Systems. “But, because it is a stock swap deal most are looking at the deal long term.”
Simpson, who will become general manager for Palm’s Enterprise Solutions Group if the deal is approved, said he felt there was still a lot of upside to the deal with many synergies between the two companies.
Palm has said the acquisition will be a key component to its restructuring, enabling it to provide chief information officers with an end-to-end mobile service infrastructure. Palm also created three strategic business groups related to the acquisition-the Enterprise Solutions Group, where Extended Systems fits in; the Individual Solutions Group; and the Platform Solutions Group.
“The acquisition of Extended Systems lets us fine-tune organizational structure around a total solutions approach that focuses on customers,” said Carl Yankowski, CEO of Palm. “This structure will enhance how we interact with all of our customers, and dramatically improve our ability to execute on our mobile and wireless strategy.”
While there is still some concern about the eventual outcome of the shareholder meeting, papers filed with the Securities and Exchange Commission show Extended Systems’ directors and officers own about 17 percent of the company, and have signed an irrevocable proxy to vote their shares in favor of the deal.
“With this purchase, Palm takes direct aim at rival Research In Motion,” said Todd Bernier, analyst with Morningstar.com. “Extended Systems specializes in wireless synchronization technology, including the burgeoning Bluetooth standard, which will enhance Palm’s `always-on’ capabilities (a la RIM).”
