Executives at Palm Inc. appear to believe they’ve bought the time and talent to move from less than 3% of the smartphone market to leadership in mobile computing.
To paraphrase Neil Armstrong, that’s a giant leap . for any company, analysts said.
This is perhaps particularly true in a fast-moving industry in which Palm is already playing catch-up, in the view of many analysts who weighed in on the latest news.
Palm CEO Ed Colligan said last week that it would take 18 months until the new management’s “brain children” would hit the market. One analyst contacted last week, unaware of Palm’s lengthy product-development forecast, said the company would be at a competitive disadvantage if it hit the market in only nine months.
Palm’s optimistic stance was articulated last week in the wake of a $325 million infusion of private equity from Elevation Partners, $400 million in additional debt and the addition of two former Apple Inc. veterans to Palm’s board of directors-subject to shareholder and regulatory approvals.
VC-infused enthusiasm
Elevation Partners, a $1.9 billion private equity firm, is providing the $325 million in cash and two of its founders-Fred Anderson, former CFO at Apple, and Roger McNamee, a veteran of other private equity firms-will take places on an expanded Palm board. Two current members of that board will resign to make room for the newcomers, which also includes Jon Rubinstein, former general manager of Apple’s iPod division.
Under the new plan, Palm will pay its shareholders a “return on capital” payment of $9 a share, a move that will cost the company about $940 million and leave it with $300 million in cash. The payout represents more than half the company’s market capitalization and, if reinvested, allows shareholders to retain three-quarters of their original equity in the newly capitalized company.
The news came just days after Palm launched a new product dubbed Foleo, essentially a screen-and-keyboard device. Analysts were divided on whether the Foleo made sense for Palm, or whether it was an ill-advised departure from its core competencies.
“Our stated objective is to be the leader in mobile computing,” said Dave Vadasz, vice president of corporate development at Palm, who was involved in last week’s financial deal. “The folks at Elevation have insight into what we’re doing and they liked what they saw. They can help us execute the strategy we have in place. This is a continuing effort to execute against our stated objective.”
Enhancements on the horizon?
Vadasz disputed a reporter’s assertion that Palm needed to make a change in strategic direction and in its product portfolio to remain competitive. He acknowledged, however, that “there’s lots of room to enhance” the capabilities of the company’s devices. Specifically, innovation in form factor is important, but with limits.
“There’s work to be done there,” Vadasz said. “But the real focus that excites us is around user interface design. We’ll continue to invest on both fronts. The real secret sauce will come in user interface design.”
Vadasz seemed to allude to further development of the company’s touchscreen technology, but he did not elaborate. Clearly, the buzz-du-jour around Apple’s iPhone and the long-running success of its iPod-and Palm’s hiring of former Apple executives-feeds speculation focused on touchscreen technology.
The Palm exec also said that one of Palm’s strengths was its embrace of high-speed networks-a competitive allusion, perhaps, to the fact that Apple’s first iPhone iteration will rely on AT&T Mobility’s EDGE network, which is one step behind the current W-CDMA technology being rolled out by GSM network operators. The iPhone also includes Wi-Fi capabilities.
Tick, tick, tick .
Tero Kuittinen, analyst at Avian Securities, L.L.C., said that whatever direction Palm pursues, time is of the essence.
“The problem is, if Palm doesn’t catch up with the competition before the next wave of innovation hits, it’s going to be impossible to make up the lost ground,” Kuittinen said. “In 2008, many models will have multi-touch, touchscreen functionality. This is a dangerous area in which to fall behind. The pace of innovation is so rapid that even the major companies are having trouble keeping up with it.”
Kuittinen said it’s rare for companies to make a sudden leap in features, size and price at the same time and Palm needs to add multiple advanced features while cutting device size and price. New smartphones from Sony Ericsson Mobile Communications, Samsung Electronics Co. Ltd., Motorola Inc. and Nokia Corp. are combining three or four “major engineering feats” in a single model.
As for Palm’s “new deal,” Kuittinen said while it excited observers, others were looking for a complete takeover by a company with deep research-and-development capabilities or by private equity.
“Nobody really wanted Palm and I think that’s a damning statement from the markets,” Kuittinen said. “This merger-and-acquisition environment means that almost anything gets bought.”
The Foleo “looks like a ‘Hail Mary’ pass,” the analyst said. “I found the Foleo announcement alarming. They should have revamped the core Treo product line.”
Todd Kort, principal analyst at Gartner, suggested that Palm’s new leadership might attract additional engineering talent to address what he described as the company’s core challenges in hardware.
“They’ve been treading water, with market share below 3%,” Kort said. “Fortunately they’ve been making profits, so they’re reasonably well-managed, financially. But they really don’t have a product that excites the market today.”
Palm, however, is not “out of the game,” Kort said.
“The most rosy scenario is to hang on to 3% of market,” Kort said. “The market is growing fast enough that if you can hang on to 3%, you can have a nice little business.”
“Everybody’s looking for a hit product,” Kort concluded. “If you don’t hit a homerun, perhaps you hit a double, or even a single. Lately, Palm’s been striking out a lot.”
