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PalmSource may be in play

The departure of CEO David Nagel leaves the company open to a takeover. Could PalmOne be interested?

The weekend departure of PalmSource CEO David Nagel leaves the wireless device software company with a completely different management team than the one that took it public in April 2004, six months after the company's spinoff by Palm.

"They have a whole new management team, from the chairman of the board to investment director," said Pablo Perez-Fernandez, an analyst with Stanford Financial Group. "It is very good for the company. They were failing to sign up significant licensees, so things had to change."

At least one analyst viewed the change in leadership as signaling that Sunnyvale, Calif.-based PalmSource could be an acquisition target.

"They lost a CFO in February, who was replaced by a better CFO, then they lost the head of sales in March, who was replaced by a better head of sales, and now you have the CEO leaving," said Jamie Friedman, an analyst at Fulcrum Global Partners. "It is a scenario where the company could get acquired."

The most likely buyer could be PalmOne, the hardware unit of the company formerly known as Palm. "This has the hand of PalmOne behind it," Friedman said. "It seems mysterious that Nagel would have stepped down and left the board."

Nagel, the former chief technology officer at AT&T, joined Palm in 2001 and served as CEO, president and director at PalmSource.

But why would PalmOne, which is profitable and whose stock trades at more than $27 a share, want to buy money-losing PalmSource, whose shares have fallen from a 52-week high of $27.20 to less than $9? In large part, the software maker's value is in the licensing agreements between the two companies under which Milpitas, Calif.-based PalmOne is contractually obligated to pay $88 million to PalmSource through next year.

"A crude analogy would be, 'My wife got so expensive to date, and fortunately she married me,'" Friedman quipped.

With a market capitalization of $150 million and $75 million in cash on hand, PalmSource would cost PalmOne roughly $75 million, Friedman said. But PalmSource could fetch up to $225 million from another potential buyer, Research In Motion, he said. The Waterloo, Ontario, company, which makes the popular BlackBerry wireless communication device, could be willing to pay more for PalmSource to expand its presence in the higher-margin software business, Friedman said.

PalmSource downplayed such speculation. "The change in leadership doesn't mean the company is for sale," said spokeswoman Maureen O'Connell.

A representative for PalmOne said Nagel had been a "great partner" for the company, declining to elaborate. PalmOne, whose CEO, Todd Bradley, departed earlier this year, last week named interim CEO Ed Colligan as the company's chief executive.

PalmSource named Patrick McVeigh, its senior vice president of worldwide licensing, as interim CEO.

The company's fortunes have declined since its IPO, as demand for its software, used mostly in personal digital assistants, or PDAs, has declined. However, PalmSource's $16 million all-stock purchase of China MobileSoft Technology, completed in January, offers it a means into the so-called feature phone market, which stands between basic mobile phones and high-end smart phones.

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