Palm deal harks back, looks forward

Buyers, once enamored of handheld devices, have grown weary of the concept that Handspring co-founder Jeff Hawkins first hewed out of balsa wood a decade ago, when he came up with the original Palm Pilot. And while that design proved to be a hot seller, there has been only a lukewarm response to his more recent creation, the Treo, which acts as cell phone, organizer and wireless e-mail device.

But executives from both companies say they understand the market realities and insist the merger is one born of business necessity rather than of an urge to return to the past.

"This is not a reunion, there is no nostalgia here," Hawkins said on a conference call Wednesday to discuss Palm's acquisition of Handspring.

Indeed, Hawkins is returning to a Palm that is barely recognizable from the company he left on July 6, 1998, to start Handspring. After an initial rise to the stratosphere, both companies have found themselves with heavy losses and dwindling cash in markets that have not lived up to expectations.

With a clever design and a simple interface, Palm's device had early success where products from many other companies had failed, from big-name players Apple Computer and Microsoft to start-ups like Go and General Magic. Palm, which spent its early years as a part of modem maker US Robotics and later 3Com, became a star as an independent company in 2000, with a market capitalization that briefly eclipsed that of General Motors.

Palm had even licensed out its operating system--hoping to avoid a common pitfall that bedeviled others who had tried to take on Microsoft. So when Hawkins and top executive Donna Dubinsky wanted to leave Palm, their new company--Handspring--became the first licensee of the Palm operating system.

Hawkins, although eager to pursue his dream of marrying the handheld and cell phone, launched Handspring with the Visor, a product much like the Palm III.

For a time, both companies flourished. But in early 2001, a series of manufacturing glitches and other missteps led to a glut of Palm products just as the economy worsened. In a matter of months, Palm turned from profitable industry darling into a money-losing company that could do no right.

Handspring, hit by the fallout from Palm's mistakes, decided to conserve resources and abandoned the traditional organizer market to focus on its hybrid Treo. The company found the move difficult, though, requiring large investments and new skills to manage the politics and whims of wireless carriers.

Both Palm and Handspring cut staff, scrapped plans for fancy new headquarters and struggled to regroup. Palm has announced plans to split its hardware and operating systems units, a move it hopes to complete prior to closing the Handspring deal.

Old friends
Todd Bradley, the former Gateway executive hired in late 2001 to improve Palm's hardware operations, said that the company will gain from the experience of Hawkins, as well as from that of other former Palm executives Dubinsky and Ed Colligan.

"Donna and Ed have played a key role in recreating this industry and together we look to do it again," Bradley told CNET News.com. Bradley will remain CEO of the combined company, while Colligan will head up a new wireless unit following the merger. Dubinsky, Handspring's CEO, will be on the combined company's board of directors but will not have an operational role.

IDC analyst Kevin Burden said that for Palm, the deal is a recognition that it was not going to win the battle to equip businesses with vast amounts of handheld computers in competition with Dell Computer and Hewlett-Packard. As a result, it needs to broaden its array of consumer products, in particular in the fast-growing market for devices that combine a cell phone and an organizer.

For Handspring, Burden said, the deal is an admission that it can't compete against the likes of the big cell phone makers. "Handspring, I think, just gets saved," he said. "We were all speculation, earlier in the year, (about whether) Handspring would make it through the year. Its cash position was extremely weak."

Handspring had been on the lookout for financing in the months leading up to the Palm deal, Dubinsky said in an interview. She expressed hope that the acquisition would help the company appear stronger to cellular carriers.

"Our position is strengthened with Palm," said Dubinsky. "Our viability was one of the questions that carriers asked us about over and over again."

Dubinsky added that the timing of the announcement was selected to give Palm an opportunity to simultaneously spin off PalmSource, its operating system arm, and to acquire Handspring. She said that the deal would not hold up the launch of the company's new Treo device, which is slated to be released this fall.

However, analysts say it is unclear how much better-equipped the combined company will be to weather the storm that has thrashed each company separately.

"The question is, can Handspring do any better by merging with Palm?" Burden said. "That is a good question."

Cash on hand is still an issue. Palm's chief financial officer, Judy Bruner, said that the company has enough cash, but concedes that it is on the low end of what the company would like. And Handspring has learned the hard way that securing the government and carrier approvals needed to launch new wireless phones is an expensive process.

"Palm is going to have the same kind of difficulties competing with Nokia and Motorola," Burden said.

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