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Sony gives PalmSource a financial hand

The consumer electronics titan takes a $20 million stake in the soon-to-be independent software arm of handheld maker Palm.

Sony on Tuesday took a $20 million stake in PalmSource, giving a shot in the arm to the soon-to-be independent software division of handheld maker Palm.

Palm said Sony's investment bolsters its plan to split its hardware and software operations later in the year, molding PalmSource into a separate company.

With the investment, Sony said, it now owns about 6 percent of PalmSource. The consumer electronics company also plans to contribute research-and-development assistance for future software.

By investing $20 million for 6 percent of PalmSource, Sony is valuing the subsidiary at $333 million.

That's nearly the level at which Wall Street is valuing all of Palm these days. The company's share price of around 65 cents a share translates to roughly a $375 million value for both the hardware and software units.

PalmSource CEO David Nagel told CNET News.com in August that the company was looking for outside funding to prepare PalmSource for independent life. At the time, Nagel said PalmSource was looking to have cash equal to about three-quarters of to one times its annual revenue. That would translate to about $60 million to $80 million.

Nagel said in an interview Tuesday that he was pleased with the implied valuation the Sony investment gives the OS unit.

"We think that all of Palm is significantly undervalued," he said. "This is about right for PalmSource."

When Sony's investment is combined with cash provided by Palm and prepaid licenses from those who use the Palm OS, Nagel said, PalmSource is close to the cash level it needs, though not quite there. Nagel said PalmSource remains in talks with other strategic investors including licensees and suppliers.

"Obviously we believe this will help in those discussions," Nagel said of the Sony investment.

Sony has been using the Palm operating system--PalmSource's main product--in its Clie line of personal digital assistants since 1999. During the second quarter of this year, Sony shipped nearly 280,000 handhelds--good for third place in the PDA market behind Palm and Hewlett-Packard, according to a recent report by market researcher Gartner.

Clie PDAs range in price from $149 to $599. The newest Clie model, the NX70V, can record videos and voice memos.

PalmSource operates as subsidiary of Palm. But moving toward its goal of separation, PalmSource recently named its own board of directors.