SHANGHAI/NEW YORK (Reuters) - Palm Inc, may be scooped up by an Asian company with enough cash and manufacturing muscle to turn around the struggling smartphone maker, but analysts warn a deal could prove too rich for any buyer at current prices.
Huawei Technologies Co Ltd became on Tuesday the latest name to surface as a possible bidder for Palm, whose phones have steadily lost customers to the iPhone and BlackBerry. Two months ago, Palm reached out to Huawei’s bankers regarding a possible deal, although talks have not moved forward, according to a source.
Palm declined to comment, but another source said this week the company has hired bankers to explore several options, including a sale of the company [ID:nLDE63C01S].
Huawei, in a statement, also declined to comment on a merger, but said it is “always open” to opportunities that will enhance its business development.
If Palm fits that bill, Huawei could face competition from a handful of other companies in Asia. Various reports suggest inquiries in the region already include a PC maker, a handset developer and a telecommunications provider.
Several North American companies — from computer maker Dell Inc to Blackberry maker Research in Motion Ltd — have also been mentioned as potential suitors.
But speculation has started to favor overseas concerns that can use broad manufacturing capabilities to boost the supply of Palm-branded phones, at lower costs, as well as help bankroll the advertising and promotion of new products.
“I think its someone who is on the outside looking in to the U.S. smartphone market — someone who wants to participate but isn’t there currently — a Huaweh or a Lenovo,” said Avian Securities analyst Matthew Thornton. “It’s those types that would be the best fit.”
Despite its challenges, Palm is the No. 3 brand in the biggest growth sector of the mobile phone market, trailing Apple Inc and RIM. In the United States, smartphones represented about one-third of new handset volume in the fourth quarter of 2009, according to NPD Group.
And smartphone sales are expected to rise about 38 percent to 65 million units in the United States and Canada this year, according to research firm Canalys.
Both Huawei, the world’s No. 2 telecommunications equipment maker, and Lenovo Group Ltd, a top PC marker that is reportedly looking to bolster its mobile Internet business, could infuse much-needed cash into Palm.
“They can capture the Palm brand, their carrier relationships, (and) the patent portfolio,” he added. “For anyone that is starting from scratch in the U.S., this deal makes some sense.”
HTC Corp, the No.5 smartphone maker, has also talked to Palm about a possible acquisition, Taiwan’s Economic Daily News said last week. Analysts view ZTE Corp, China’s No. 2 telecommunications equipment maker, as another possible suitor. ZTE could not be reached for comment on Tuesday.
“Huawei and ZTE are potential buyers. It makes sense: they don’t have an operating system or a brand, but they have cheap manufacturing costs and money to invest and develop the brand,” said IDC analyst Francisco Jeronimo in London.
“Consumers don’t associate Chinese brands with quality products and don’t pay a premium for such a mobile phone. Palm would be perfect for them.”
Palm shares have jumped more than 55 percent in the past week on speculation about a potential sale of the company.
But the stock fell 14.6 percent to close at $5.16 on Tuesday after analysts suggested the rally made the company too pricey.
“We remain concerned that it may be a ‘take-under,’ meaning a price that is below its current share price,” Kaufman Bros. analyst Shaw Wu said in a note.
“This is due to Palm’s large operating losses and likelihood that operating expenses remain high due to investment required to stay competitive in the smartphone space.”
Based on recent deals in the technology sector, Palm could potentially fetch $1.3 billion, given its current $1 billion market capitalization and the 30 percent premium recently paid in tech deals. Analysts, however, doubt bids will reach that level.
Additional reporting by Tarmo Virki in Helsinki; editing by Paul Thomasch, Derek Caney editing by Andre Grenon