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Palm looking to fund company split

The handheld maker is in talks to raise money as it seeks to separate its operating system unit from the part of the company that builds and sells handheld computers.

Handheld maker Palm is in talks to raise money from strategic investors as it seeks to separate its operating system unit from the part of the company that builds and sells handheld computers.

In an interview, PalmSource CEO David Nagel said the company has not yet closed the round, but has confidentiality agreements in place with a number of both strategic investors and financial firms.

"We're really talking to a mixture of what I would say are strategic investors--people that would have either the status of technology partners or perhaps customers--on the one hand and then strategic financial investors on the other," Nagel said.

Palm's goal is still to split into two separately traded public companies by around year's end or early next year at the latest, Nagel said.

"We currently plan to either do an IPO or do a stock distribution (to existing Palm shareholders), which given the state of market is probably in all honesty the more likely course," Nagel said

The company has already established PalmSource as a wholly owned subsidiary and begun breaking out that unit's financial results. Palm is also making a physical separation as both units are leaving Palm's current headquarters on 3Com's campus to new, separate locations in Silicon Valley.

Palm has not revealed the exact amount of cash it is looking to raise from investors for PalmSource, but Nagel said the standard capitalization for software companies is about three-quarters to one times annual revenue.

"I think you can sort of do the math," he said.

In the two quarters in which Palm has broken out the revenue attributable to PalmSource, the software unit has averaged just shy of $20 million in quarterly revenue. Based on Nagel's figures, one might assume PalmSource is looking to begin independent life with somewhere between $60 million to $80 million in its coffers.

"We have been capitalized to some degree by Palm already and we have to add to that," Nagel said. "We're talking about relatively modest amounts of money because a software business does not need a lot of capital."

"We don't have to invest in inventory. We don't have to invest in parts," Nagel said. "We basically need the capital to run the company, pay the engineers, do the marketing and so on."

The company, whose shares have plummeted over the past year and a half, have continued to fall since the company announced plans in July 2001 to divide in two. At the time the company was trading at more than $5 a share, but by last month shares had fallen to less than $2.

The continued decline prompted the company to seek shareholder approval to conduct a reverse stock split, a move designed to artificially boost the company's share price to more attractive levels.

By doing a reverse stock split, Palm hopes to make its shares more attractive to institutional investors as well as meet Nasdaq's $1 minimum share price requirements for both Palm and PalmSource.

However, Palm's share price has continued to fall, trading below the $1 mark for the first time over the past few weeks.

Palm has also tried to strengthen its cash position. Last December, Palm announced that an unnamed investor had provided $50 million in financing.

Nagel admits that the market is not what it once was, but says Palm is still finding companies and institutions that are open to investing.

"Anyone that is breathing is probably somewhat gun shy about investing," Nagel said. "All of the people that we're talking to are viewing PalmSource as an interesting long-term investment."