Palm Inc has hired bankers to explore several options, including a sale of the company, whose smartphones sales have suffered badly against rivals like the iPhone and BlackBerry.
Palm, whose shares jumped 19 percent Monday to $6.16, is working with Goldman Sachs Group Inc and investment banker Frank Quattrone's Qatalyst Partners, according to a source, who spoke on condition of anonymity because the process has not been made public.
Alternatives include the pursuit of additional capital investment or an attempt to reach a licensing agreement for its WebOS phone operating system software, the source said.
News that Palm had hired Goldman and Qatalyst was first reported by Bloomberg, and followed several days last week when the company's stock swung wildly on takeover rumors. For the week, Palm shares were up 32 percent.
Speculation about a sale of Palm has swelled, as sales of its Pre and Pixi handsets flag amid concerns that it cannot compete against Research in Motion Ltd's BlackBerry, Apple Inc's iPhone or phones powered by Microsoft Corp and Google Inc software.
But analysts cautioned that Palm's exploration may not end with a sale, given Chief Executive Jon Rubinstein's optimism -- at least publicly -- that the company can be turned around.
Last month, Rubenstein told analysts that the issues we are facing are far from insurmountable and that the long-term potential for Palm remains strong. He reiterated that stance in an interview last week with Fortune magazine, in which he said Palm's transformation had merely hit a speed bump.
The change of direction seems very sudden -- who knows what may have happened behind the scenes, said NPD analyst Ross Rubin. But it is very competitive out there, and Palm is competing with some companies that have tremendous resources.
PRICE TAG - MORE THAN $1 BILLION
Suitors would likely pay more than $1 billion for Palm. As of Friday's close, it had a stock market value of $870 million, and deals for technology companies are carrying a premium of about 30 percent these days, according to bankers. Any buyer would face additional integration costs.
Still, the price tag could be far lower than what Palm would have fetched last year, following the introduction of its Pre phone. In the past six months, the money-losing company's stock has tumbled 69 percent, and its market capitalization has tumbled from about $2.4 billion.
At the moment, Elevation Partners, the private equity firm that includes U2 lead singer Bono among its partners, controls roughly 30 percent of Palm. Elevation in 2007 bought a 25 percent stake in Palm for $325 mln, and has made three more investments in the company since then.
Spokespeople from Palm in Europe, Goldman Sachs and Elevation declined to comment. Qatalyst did not immediately return calls for comment.
For years, Palm was considered a target for larger companies hoping to enter or expand in the mobile market. Analysts say its most valuable asset is the WebOS operating system, which yielded rave reviews but lackluster sales.
Palm shipped a total of 960,000 smartphones in the February quarter, but only 408,000 of those went to consumers.
Palm's limited scale, distribution and weak global brand outside the United States all point to a takeover as the next chapter in the Palm story, said CCS Insight analyst Geoff Blaber.
The challenge, Blaber said, would be finding a buyer prepared to pay a premium for an immature platform, particularly when so many companies have already invested heavily in Google's Android system.
What may have pushed Palm to consider a sale, analysts said, is the intensifying competition in smartphones, among the hottest areas in consumer electronics. Not only does Apple have plans to improve its already popular iPhone, but Microsoft on Monday unveiled another new line of phones.
What's more, Palm's effort earlier this year to bring its Pre and Pixi phones to Verizon -- after they had been exclusively sold by Sprint Nextel Corp -- failed to ignite sales.
It's as a good a time as any (for a sale), because I just don't see an immediate turnaround, said analyst Lawrence Harris of CL King & Associates.
Interest in Palm could come from a number of corners, including computer makers and rival handset makers.
HTC Corp, the world's No. 5 smartphone maker, had opened discussions about an intent to acquire Palm, Taiwan's Economic Daily News reported on Friday. Earlier in the week, rumors circulated about a potential bid from Lenovo Group.
Dell Inc and Microsoft, as well as handset manufacturer Nokia and Motorola Inc have been named in the past as potential suitors.
(Additional reporting by Tarmo Virki in Helsinki, Sakthi Prasad in Bangalore and Victoria Howley in London; Editing by Karen Foster, Derek Caney and Richard Chang)