Although the value of Palm's offer to buy Extended Systems has
been cut in half by the handheld maker's stock collapse this week, analysts
and the companies themselves expect the deal will still go through.
When the deal was announced
March 6, Palm said it would give shareholders of the mobile data management
company $22 worth of Palm shares for each Extended share, subject to certain
restrictions. At that valuation, the deal was worth $264 million.
However, one of the restrictions is that if Palm's stock falls below $16.60,
Palm will instead offer 1.325 shares of its stock for each Extended share.
Palm fell well below that point
Wednesday, a day after the company warned that sales would be far less than expectations, leading
to a loss in the current quarter. On Thursday, Palm's stock edged down
another 6 cents to close at $8.
Based on Wednesday's $8.06 closing price for Palm, the deal would amount to
$10.68 in Palm shares for each Extended share--or a total deal value of
roughly $128 million, which is less than half the original price tag.
Extended's shares were trading at $23.13 before the Palm deal was formally
announced, thanks in part to a report on The Wall Street Journal
Web site noting that a deal was imminent.
At the time, both companies praised the deal. Palm called the move critical
to its efforts to sell handhelds to big businesses. Extended helps large
companies give employees access to corporate software via wireless devices.
Palm also announced plans to make Extended the core of its new enterprise
In the wake of Palm's slide, some have questioned the value of the deal to
Extended shareholders. Nonetheless, both companies reiterated they plan to
go ahead with the transaction. The bid still requires the approval of
Tim Quillan, an analyst at brokerage Stephens Inc., said that the deal is
likely to make it, despite the low valuation and dismal outlook for Palm.
"Between management and employees, they have kind of a quorum," Quillan
said. Directors and company officers own about 17.6 percent of Extended's
common stock, while two other employees together own another 20 percent of
Extended's common stock, according to recent filings with the Securities and
Exchange Commission. The directors and officers have signed an irrevocable
proxy to vote their shares in favor of the deal, according to an SEC filing.
Fidelity Investments is the largest outside investor in the company, holding
7.7 percent of the company as of Dec. 31, according to a February SEC
filing. A Fidelity representative declined to comment on the matter, citing
a company policy against commenting on individual deals.
However, Quillan has questioned the value of the deal to Extended
shareholders and put a "sell" rating on Extended's stock after the Palm deal
was announced. Quillan said Boise, Idaho-based Extended is largely run by
engineers, who are by nature risk averse, and see benefits in hooking up
with a larger company.
"I question the synergies, but they see synergies," Quillan said.
The deal also may not be good for some of Extended's 350 employees, who
could lose their jobs when the deal closes. Palm said Wednesday it will cut
250 permanent and temporary workers from its ranks and suggested more cuts
could be coming.
"Further reductions are expected associated with the acquisition of Extended
Systems," Palm CEO Carl Yankowski said in a conference call with analysts.
Although some say Extended's shareholders are getting a poor deal, Needham &
Co. analyst Rich Valera said the Palm deal may still be the best option for
"You have to look at what the alternatives are," Valera said. "It's not
clear that Extended's stock would rally (that much) if the deal fell
Extended's stock was trading at an average price of about $15 to $16 in the
15 days leading up to the Palm deal, Valera said. Since then, concern has
increased that large companies are clamping down on discretionary IT
"Extended Systems' business is probably going to be affected by that,"
Valera said. "Who knows how badly their business has been hurt and where
their stock would be trading."