Palm looks to Be for OS boost

The handheld specialist plans to acquire the assets and intellectual property of Be for $11 million in stock, as it pursues its goal to bolster its software division.

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Palm announced on Thursday that it is acquiring the technology assets and intellectual property of software maker Be for $11 million in stock, in a move aimed at strengthening its operating system to compete against Microsoft.

Palm said it expects the acquisition to bolster its OS, particularly in the areas of communications, Internet and multimedia technologies.

"This move will help us expand the Palm OS platform into broader markets," Carl Yankowski, Palm?s chief executive, said in a statement.

Palm also said that Alan Kessler, the general manager of its Platform Solutions group, will resign from the company Friday. That unit, which Palm recently decided to turn into a subsidiary, is responsible for developing and licensing the Palm operating system.

Palm spokeswoman Marlene Somsak said Kessler had worked with Yankowski over the past several months to plan the strategy to improve Palm's OS by creating the separate subsidiary and accelerating the transition to more powerful ARM-based chips. But Kessler, Yankowski and Palm's board all agreed that someone else was needed to head the OS unit, she said.

"It was generally agreed that this was the right thing to do," Somsak said.

Kessler told CNET News.com that Palm needed three things to build its operating system business--deeper investment from Palm, more separation from the hardware business and a new leader for its OS division.

"I feel this is a real great opportunity for Palm to be able to take the platform to the next level," Kessler said. "I had talked to Carl about this. This is something we had planned for some time."

Eric Benhamou, chairman of Palm's and 3Com's boards of directors, will act as chief executive of the group until a permanent replacement is named, according to Palm, which is based in Santa Clara, Calif.

IDC analyst Alex Slawsby praised the acquisition of Be as a way to improve the Palm OS in the face of Microsoft's rival Pocket PC OS.

"If Palm can take advantage of Be's strengths, it will help to put it in a stronger competitive position with Pocket PC," IDC analyst Alex Slawsby said.

see story: Be: A long history of almost Analyst William Crawford, who covers Palm for U.S. Bancorp Piper Jaffray, agreed that the purchase can help Palm.

"Where they have to go, Be already is," Crawford said. He added that it is never easy to integrate operating systems but that using some of Be's technology, especially in the area of multimedia, could help.

Palm is particularly looking to play catch-up with Microsoft in the area of multimedia. Unlike the Pocket PC OS, the Palm OS does not natively support playing MP3 files.

Crawford praised Palm's deal for other reasons too.

"They're getting (Be) for next to nothing," he said.

As for Kessler's departure, Crawford said, "It's appropriate for Palm to seek some new management talent."

Jean-Louis Gassee, Be's chairman and chief executive officer, will temporarily help Palm to integrate Be's technology and work force once the transaction is approved by Be shareholders. The deal is expected to close in the fourth quarter.

Gassee Menlo Park, Calif.-based Be, founded by former Apple Computer executive Gassee, originally focused on creating an operating system fine-tuned for audio and video production. Although it has a base of devoted fans, Be has struggled to find a market for its OS. Most recently, Be tried to market a version of its OS--dubbed BeIA--for use in Internet appliances.

Its only notable win of late was a deal to power Sony's eVilla Web-surfing appliance.

Be's future with the eVilla appears shaky.

"The OS will continue to be supported within eVilla," Sony spokeswoman Gretchen Griswold said. However, Griswold said, how that will occur is unclear. Among the options under consideration is having Palm support the eVilla OS, she said.

However, Palm said it has no plans to further develop the Be operating system as a standalone OS.

"We don't plan to take on the Sony license for eVilla. We may decide to provide some transitional support for Sony if we can structure it appropriately," Somsak said.

Be currently has 57 employees. Somsak said Palm plans to hire up to 50 of them, while a small number will remain with Be after the deal closes to wind down that company's business.

P.C. Berndt, Be's chief financial officer, said that after the asset sale to Palm, Be will pay its creditors and other obligations. "The remainder will be returned to shareholders, whatever that may be," Berndt said. "We wouldn't have done (the deal) if we didn't think it was the best alternative (for) shareholders."

Be had $4.9 million in cash as of June, he said.

The Palm-Be deal marks a rather inglorious end to the company that Gassee launched in 1990 when he left Apple.

In 1996, Apple offered as much as $125 million for Be, according to the book "Apple Confidential." But Gassee and Be's backers held out for more. Instead, Apple acquired Steve Jobs' Next and Be was left to fend for itself.

As part of his temporary work with Palm, Gassee will provide advice related to the planned separation of Palm's hardware and OS units. Palm currently runs as a single operation, but the split could help ease tensions between Palm and its OS licensees, which include Handspring, Sony and HandEra. While these companies use the Palm OS, they compete with Palm's own brand of hardware.

Shares of Palm have been battered--falling more than 85 percent this year--in the face of stiff competition from a growing crop of handheld makers and a souring worldwide economy. Although the company maintains its No. 1 position in the handheld market, its sales in the corporate sector lag behind those of competitors.

Regardless, Microsoft still runs a distant second to Palm in the market for handheld operating systems. Palm's OS was found in 86 percent of all handhelds sold in the U.S. retail market in May, according to NPD Intelect.

Earlier this month, Dataquest released a study indicating that global shipments of handheld computers plummeted 21 percent from the first quarter to the second.

News.com's Richard Shim contributed to this report.