HONG KONG (Reuters) - Lenovo, the world's No.4 PC brand, has emerged as the leading candidate to buy struggling smartphone maker Palm, after the U.S. firm was rebuffed by other potential Asian buyers, sources said.
Shares of Hong Kong-listed Lenovo rose as much as 5.9 percent to a 23-month high on Friday, helped by expectations of strong growth in the sector and speculation that it could bid for the U.S. company once considered a pioneer in the smartphone space.
"A most suitable candidate will be a mainland Chinese company," said Lu Chialin, an analyst at Macquarie Securities in Taipei. "They've got a lot more free cash and don't have the brand presence in the United States, so that will all give them that boost they need."
Investment banking sources said they had heard that Lenovo is looking into a possible bid for Palm, but did not have any further details.
HTC, the world's No. 5 smartphone brand and one name associated with a possible offer, was approached about making a bid but decided to pass after reviewing Palm's books, a source with direct knowledge of the situation said.
"There just weren't enough synergies to take the deal forward," said the source, who declined to be identified because the talks were private.
Huawei, the world's No.2 wireless telecoms equipment maker, also declined to put in a bid, a company source said earlier this month. Smaller rival ZTE, also mentioned in earlier reports as a possible bidder, was not approached on the deal, its chairman told Reuters.
Representatives from HTC and Lenovo both declined to comment, and Palm officials were not immediately available outside regular U.S. business hours.
Earlier this week, Lenovo's Chief Executive Yang Yuanqing also declined to comment about a possible Palm buy. Shares in the company closed up 2.7 percent at HK$6.09 in a Hong Kong markets down 1 percent.
Industry observers said Palm would fit well into cash-rich Lenovo's current strategy that focuses on growth through acquisitions and movement into the wireless space.
Lenovo had over $2.4 billion in net cash reserves at the end of 2009, it said on its website, and has previously said that it remains open to merger opportunities.
Based on recent deals in the technology sector, a Palm sale could potentially fetch $1.3 billion, given its current $1 billion market capitalization and the 30 percent premium recently paid in tech deals.
The company's advisers had previously been seeking about $1.2 billion for the company -- a valuation considered too rich by many suitors, one investment banking source said, speaking on the condition of anonymity.
Another investment banking source, who also spoke on condition of anonymity, said he was unsure on how aggressively Lenovo was going to be in bidding for Palm.
"What are you buying - a good operating system?" he said. "It's a wounded brand."
Palm has struggled to generate interest from buyers in its Pre and Pixi smartphones, with customers turning to more popular buys such as Apple's iPhone and Research in Motion's Blackberry. It sold about 408,000 units in the quarter ending February 26, lower than the 600,000 units or more many analysts were expecting.
After selling its cellphone unit to focus on its core PC business, Lenovo bought back the unit last year as part of its aim to become the Chinese market leader in mobile communications, as the sector starts to converge with PCs.
Since then, Lenovo has launched a smartphone in China, but still has no presence in the U.S. market, which remains the world's largest smartphone market by number of users, according to research firm IDC.
Market research firm Gartner expects growth in the smartphone sector to outpace PCs in 2010, drawing a flurry of new entrants into the sector once dominated by names like Nokia and RIM.
The Palm purchase, if realized, would also fit into Lenovo's history of expanding into competitive Western markets by buying former product pioneers that have lost their edge.
The company is best known for buying IBM's PC business in 2005, and it also tried to buy Packard Bell in late 2007, only to be thwarted by bigger rival, Taiwan's Acer.
The strategy has its critics.
"It's not a good idea for Lenovo to buy Palm right now," said Vincent Chen, an analyst at Yuanta Securities. "If it does, it's got to be prepared to take on some of Palm's losses and may have to see at least a few more quarters of losses from them."
Additional reporting by Michael Flaherty and Melanie Lee in Shanghai; Editing by Doug Young and Lincoln Feast