Recently I commented on why Palm’s (PALM) patents were an overlooked asset and why this strengthened the case for an acquisition. Since then Palm reported earnings and provided guidance that scared the crap out of investors; sending the stock on another nosedive to around $4. It’s not clear the whether they could have hung a bigger for-sale-sign on the company, but to be fair, they were just being honest about the current situation.
The biggest issue that puts them in play right now is the cash burn-rate of the company and their current valuation; the market cap is around $667 million. Sales are expected to plummet next quarter as carriers work off excess inventory and while the company has a $600 million cash cushion, this is likely to vaporize quickly as sales dry up.
Cash Burn on Overdrive
The company is expecting less than $150 million in sales this quarter; a huge drop from the $349 million in the prior quarter. This is mostly related to the excess inventory that the carriers are holding, but this is scant relief, because the whole problem is end demand and no reduction in inventories is going to fix that.
The other issue weighing on their cash balance is their huge accounts payable balance of $190 million (almost 2x its receivables), which will also burn through a lot of cash this quarter. All told, the company could easily lose a few hundred million this quarter and be out of cash in 12 months; it all depends on sales. The only bright spot (relatively speaking) is that their $400 million of debt is only due in 2014, so they don’t have to worry about that now. They also don’t appear (per their 10-K) to have any of the potential debt covenant issues Jean-Louis Gassée refers to; he thinks the lender might be able to demand repayment of its loan before Palm runs out of cash and leave the company hanging in mid-air, Wile E. Coyote like.
Palm is facing a crisis of confidence that is eerily reminiscent of what the financial institutions faced just a year ago. It doesn’t really matter if the loss of confidence is just external to Palm and not internally, because if the carriers, developers and consumers don’t think they are going to make it, they likely won’t, unfortunately.
Some may think the announcement of the Pre and Pixi Pluses for AT&T is a big positive, but maybe not. This implies that it’s unlikely they are going to ship a new phone soon. Given the impending launch of the Nexus One for Verizon, Sprint and AT&T, as well as a likely significant iPhone upgrade this summer, it looks like a lost cause for Palm now. WebOS may have a lot of potential but their current products have been eclipsed in hardware terms and new competitor hardware is on the horizon. No amount of marketing is going to make the products sell well against the coming competition.
So Why Would Anyone Bother Buying Palm?
WebOS, the Palm patents and the ex-Apple talent are what drives the interest in the prey that is Palm. Too many confuse WebOS with the Palm and Pixi products, but its the hardware that is constraining the software and that is a lot easier to fix than a poor operating systems. Just think of how long it took Palm, Apple, Google and now Microsoft to develop their new mobile operating systems; years.
Critically there are many companies that would be interested in WebOS — some obvious and some not so obvious. Probably the best way to frame the value of WebOS is to think of the size of the overall cell phone market was 1.1 billion units in 2009. If the future of the phone industry is smartphones then over time there are only going to be handful of OS’s that will prevail. WebOS has the technical pedigree to be one of those platforms. Nothing is certain, but for a number of companies it might provide the opportunity, or at least the perception of the opportunity, that they could be one a handful of platforms in this market.
The patents are also likely to be attractive to a variety of companies as there is good reason to believe that it’s the main reason why Apple did not sue Palm, but HTC instead. And then there is also the App catalogue to consider. With Palm’s recently released PDK they have probably the best gaming development platform after the iPhone, but again for this to get serious traction with developers they need to believe in the viability of the platform, which is unlikely as long as Palm remains independent. The case for the talent is pretty much self evident.
And Does it Matter How Long a Buyer Might Wait?
From an acquirer’s perspective, everyone that might be interested in Palm knows they could be very close to needing life support and waiting for the point at which they will need resuscitation could be very costly . They also know that there has got to be more than one other party interested in acquiring Palm so they can’t sit simply bide their time before they make a bid, lest they lose the company to another bidder. See what happened to Apple when they dawdled on AdMob, which Google then acquired, and then Apple wound up buying what looks like was a second choice option.
Then there is the time to market issue. There are quite a few OS’s in development and Android and the iPhone are leaping ahead; no buyer has the luxury of sitting back to wait and see how things play out if they want to compete.
This still seems like the biggest beneficiary of a Palm acquisition. While still the undisputed king of mobile in terms of unit volume sales they are struggling in smartphones.
Despite all their claims of being the biggest smartphone vendor, only 5 million of the 21 million smartphone sales in their last quarter were their high end N-series devices; overall unit sales were 127 million. Whatever their claims are to the contrary, they don't have product leadership in smartphones and Symbian doesn't cut it as a smartphone OS. For those wondering, Samsung grew unit volumes 16% in 2009 to 227 million, while Nokia declined by 8% to 432 million.
Consider that both the iPhone and Android smartphone platforms, which are getting the most developer traction -- as measured by apps developed for them -- are new OS's. Microsoft and Palm have also created new OS's (Windows Phone 7 and WebOS) and even Samsung which also makes Symbian based devices is making a new OS (Bada) for smartphones. Samsung's decision seems misguided -- and we'll get to that later -- but it speaks volumes when the #2 (and faster growing handset vendor) is not showing support for Symbian in their highest end smartphones. Even LG appears to be placing its high end smartphone bets on Windows 7 and Android.
This lends some credence to the superphone notion that Google bandied about with the release of the Nexus One. Like many, I don't find this designation that useful, but it does point out a problem with the smartphones definition. The category is too broad and includes too many devices that make companies like Nokia seem like they are doing better than they are in this segment.
The immediate benefit that Nokia would get is being able to put WebOS on much better hardware, and ship it through their global channels, plus they immediately get more presence in the US as a result of Palm's existing carrier relationship. Nokia has indicated they want to address the US market, but they only sold 3% of their phones in North America in 2009.
And of course they could immediately get the smartphone OS that they need. Developer support could strengthen dramatically if they knew WebOS would be backed by Nokia. It would be a bitter pill for their Maemo (now Meego) team to swallow, and for the company to acknowledge their flagship platform had to be acquired. They have previously shown a willingness to do large US based acquisitions -- they acquired Navteq for $8 billion -- but admittedly, that was for a mapping solution and was not to replace an internally developed, but inferior product.
Whether Nokia can suck up their pride seems to be the biggest issue for them. The bonus is they also get all the Palm patents as well and since they are already in a patent lawsuit against Apple -- which they initiated last year -- this could be very useful.
Nokia has almost $12 billion in cash and about $6 billion net cash (less long term debt).
Motorola has made the comeback Palm wished for. Having squarely placed their bets on Android as a smartphone OS, they developed the first really serious competitor to the iPhone, the Droid. Even Rubinstein acknowledged that the Droid stole the thunder from Palm Pre's Verizon launch.
Motorola is flush with cash and on a well established comeback in mobile phones so you might wonder why they would even want Palm. It doesn't make that much sense until you consider what Sanjay Jha recent said, 'If I had more money for R&D, I'd be developing an operating platform.'
This seems really surprising given their recent success with Android, but its somewhat understandable. Now that Google has shown with the Nexus One that it will compete with customised Android versions, handset makers are going to be more open to trying something proprietary again. The other key part is that handset makers instinctively want to have more control of their products to differentiate them. It might not always make sense, but its the instinct that counts. Motorola, HTC, Samsung, Sony Ericsson, Acer and others have all made customised versions of Android. So this instinct is pretty pervasive.
This instinct -- for those not convinced -- is even more obvious and irrational with carriers, which have always used their own apps to turn cell phones into mutant devices. So from an acquisition perspective, its not just whether it makes sense, its whether its perceived to make sense to the acquirer. Most acquisitions don't actually make sense.
One other attraction Motorola might have for Palm, is borne of their desire to have a common platform for handsets and set-top boxes. Again, they could use Android, but conceivably they could do this with WebOS too.
Motorola has $8 billion in cash and about $4.6 billion in net cash.
Engadget mentioned this on their recent podcast. I hadn't given this too much thought since they are based in Taiwan and this would complicate integration, but they brought up the obvious, and really good point, which is that HTC makes some of, if not, the best smartphone hardware. Palm's biggest failure has been on the hardware front. There is little doubt that WebOS running on HTC phones would be miles better than their current Pre and Pixi. And HTC is a machine at producing extremely high quality devices for both Windows Mobile and Android.
HTC also has the best customised version of Android, displaying arguably, the highest level of aesthetic sensibility outside of Apple. Then there is their current lawsuit with Apple and the value of Palm's patents in this matter. HTC probably couldn't do an all cash deal, but they could do a stock, or cash and stock deal.
HTC has $2 billion in cash and virtually no debt.
As I pointed out in my prior post, the biggest issue with RIM is they appear to be too drunk on their own kool-aid. The company is still growing at a rapid rate, but they have gone from having the best smartphone before the iPhone to a weak contender, especially in touchscreen devices. Jim Balsillie likes to invoke superlatives as much as Steve Jobs does to describe Blackberry products, which is the problem; RIM makes middling to good, but not great products.
While they once dominated on the virtue of their email capabilities the newer smartphone devices are more web-centric and RIMM's ageing OS does not appear to have the legs to fight in the future smartphone wars (see this great article by Boy Genius Report to understand the depth of their problems). Part of their problem is that because RIM has probably one of the best legacy smartphone OS's they are less likely to make a radical departure to a new one.
RIM has roughly $2.4 billion in cash and no debt.
Lenovo, the 4th largest PC manufacturer, unveiled a high-end Android smartphone at CES and has publicly stated they expect to generate 80% of their revenue from wireless products within 5 years. More importantly, they bought IBM's PC division in 2005, indicating their willingness to make a big foreign acquisition. For those that have not been paying attention, almost all the PC makers are looking to get into the smartphone business as the margins are materially better than than those in the PC business.
Lenovo has $2.4 billion in cash and about $1.9 billion in net cash.
Dell is struggling as a PC maker (they are about to be eclipsed by Acer as the 2nd largest PC vendor), but they are flush with cash. They are also really trying to mix things up and do out-of-the-box products such as the Adamo and the Mini 5 (a 5' inch Android smartphone). As with all the PC makers that might be interested they are all also likely considering the optionality of scaling up WebOS for tablet type devices. PC World and others have considered the prospects for a WebOS tablet. The fact that both Android and the iPhone OS are being used in tablets supports this notion.
Dell has $11 billion in cash and about $7.5 billion in net cash.
Acer is the fastest growing Windows PC maker and has already launched the Acer Liquid -- an Android smartphone -- as well as announced 3 others to be launched in March/April. Along with ASUSTek they are dominating the netbook market, and if you believe the netbook makers are the more adventurous of the PC makers, then they should have more than a passing interest in Palm. They have also made significant foreign acquisitions, noteably Gateway and eMachines.
Acer has $1.3 billion in cash and about $0.9 billion in net cash.
The Korean duo that are #2 and #3 in the mobile market are hard to figure out as potential buyers; at least for me. I am not aware of significant US acquisitions they might have made, which leads me to believe that they are not inclined to buying new technology. However they are both significant Symbian vendors, which is limited for smartphones. Samsung is doing their Bada OS, but this could simply be too late to be relevant. In addition to the iPhone and Android there is also the new Windows Phone 7 Series that has been announced (and looks competitive). It seems very questionable whether either LG or Samsung could succeed doing any smartphone OS on their own; they are both known for doing good hardware.
Samsung has $11 billion in net cash and no debt. LG has $5.9 billion in cash and about $3.5 billion in net cash.
Like Motorola Sony Ericsson has been struggling in the mobile market in the last few years. Unlike Motorola they are not on a comeback trail. Their unit volumes shrunk from 97 million in 2008 to 57 million in 2009. The joint venture has been focusing on high end devices but is very late with their Xperia X10 Android phone. While Sony is only 50% of the joint venture, we know they love proprietary technology, which might make Palm interesting for them, or maybe even for Sony itself. It doesn't hurt that the JV is in bad shape.
Sony Ericsson has a net cash position of about $840 million.
HP is not very active in the smartphone space. They have an iPAQ Glisten, but most people don't even know it exists. However, they have done a lot of tinkering in the tablet space, most notably with the HP Slate. They have also been tinkering with their own touch-based interface for some PCs, confirming both tablet and proprietary touch based ambitions.
HP has $13.5 billion in cash but also $15.9 billion in long term debt. The company generates huge amounts of cash flow and would easily be able to buy Palm if they wanted to.
I hadn't really considered this seriously either, but ex-Appler Phil Kearney makes some good points, principally to get Palm's patents, which could come in handy with their future expected spats with Apple and to get the ex-Apple developers that made WebOS; they could easily be transitioned to Android work. I am not convinced since there is a lot of overlap and it could also mean having to layoff a lot of people.
Google has $24 billion in cash and no debt.
So there are a lot of potential buyers -- some more obvious than others -- but a lot nonetheless. I am also sure to have left some out.
The final thing to consider is that for many of the potential buyers, they need to consider not only what Palm might be worth to them, but also what is the value of not letting someone else buy them. For example, Motorola would likely be happiest if Nokia continued down its merry Meego path to a Symbian sunset, rather than have them acquire WebOS and put all their weight behind it. This consideration applies for most acquisitions but people often forget this.
In any event the countdown to the end of Palm as we know it has begun.
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