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Investors still wary
of Palm software unit's value
Using what little information they have about the particulars of a PalmSource spinoff, investors as of Wednesday morning -- one month after the deal was announced -- were valuing the software unit at about $110 million.
That's more than $200 million less than what PalmSource looked to be worth last October when Sony Corp. (JP:6758) bought a 6-percent stake of the unit for $20 million. By extrapolating, that pegged PalmSource at about $320 million.
The valuation is reached by calculating how much Palm's 68-percent stake in the combined companies would be worth and subtracting that figure from Palm's current market capitalization. The difference yields the valuation the market currently assigns to PalmSource. The figure continually changes as the stock prices move.
"This is effectively the credit we get for the value of PalmSource embedded into Palm," said Philippe Morali, Palm's vice president of corporate development, who negotiated the deal with Handspring.
"It doesn't reflect any unleashment of value as a result of the spin and that's one of the reasons it's impossible at this stage to tell you what the value of PalmSource is," he added.
Palm, the pioneer of the handheld computer craze, has struggled in recent years to compete in the emerging market for Internet-connected phones and handheld computers.
To address this, Palm for two years has been contemplating a spin-off of its software arm, which supplies the underlying operating system used to run not only Palm's own hardware, but also devices made by licensees such as Sony, IBM (IBM) and Symbol Technologies Inc. (SBL)
Morali declined to discuss Palm's internal valuation of PalmSource. The spinoff is seen by year-end and more details about the merger plan are anticipated in early July.
Analysts expect investors ultimately to value PalmSource somewhere between the Sony basis and the one obtained using the merger formula. The valuations the market currently ascribes to the deal, however, could be short-changing the software unit or overvaluing the combined hardware business.
"Palm is buying a beautiful product line from Handspring and getting some management help, but I don't know if that's going to be enough to keep people interested in the device company," Nutmeg Securities analyst Peter Labe said.
"I guess we give Palm the benefit of the doubt and say software will be better off as an independent," he added, "but I don't know if it's going to change a lot of things." (Additional reporting by Eric Auchard)