-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T95hCbW4VFAoU+ZMq7+zgF27h9bVLEuXaApNbK4Cv539W0VqRbHia0Sfd1haRHd4 z3p5LN46yj3Jkga5SR7AEQ== 0001193125-06-017516.txt : 20060202 0001193125-06-017516.hdr.sgml : 20060202 20060201182243 ACCESSION NUMBER: 0001193125-06-017516 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20060202 DATE AS OF CHANGE: 20060201 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: NELSON MARK CENTRAL INDEX KEY: 0001173485 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: BUSINESS PHONE: 7077388941 MAIL ADDRESS: STREET 1: 1481 SAGE CANYON ROAD CITY: ST. HELEN STATE: CA ZIP: 94574 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: PALM INC CENTRAL INDEX KEY: 0001100389 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER TERMINALS [3575] IRS NUMBER: 943150688 STATE OF INCORPORATION: DE FISCAL YEAR END: 0603 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-61107 FILM NUMBER: 06571054 BUSINESS ADDRESS: STREET 1: 950 W. MAUDE AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94085 BUSINESS PHONE: 4086177000 MAIL ADDRESS: STREET 1: 950 W. MAUDE AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94085 FORMER COMPANY: FORMER CONFORMED NAME: PALMONE INC DATE OF NAME CHANGE: 20031029 FORMER COMPANY: FORMER CONFORMED NAME: PALM INC DATE OF NAME CHANGE: 19991203 SC 13D/A 1 dsc13da.htm AMENDMENT NO.2 TO SCHEDULE 13D Amendment No.2 to Schedule 13D

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

SCHEDULE 13D

(Rule 13d-101)

 

 

(Amendment No. 2)

 

 

 

 

PALM, INC.

(Name of Issuer)

 

 

Common Stock, $.001 Par Value

(Title of class of securities)

 

 

69713P107

(CUSIP number)

 

 

Mark Nelson

255 Long Ranch Road

St. Helena, CA 94574

(707) 738-8941

 

With a copy to:

 

Steven Della Rocca, Esq.

Charles Nathan, Esq.

Latham & Watkins

885 Third Avenue

New York, NY 10022-4834

(212) 906-1200

(Name, address and telephone number of person authorized to receive notices and communications)

 

 

January 28, 2006

(Date of event which requires filing of this statement)

 

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box  ¨.

 

Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Rule 13d-7 for other parties to whom copies are to be sent.

 

(Continued on following pages)

 

(Page 1 of 10 Pages)

CUSIP No. 69713P107    13D    Page 2 of 10

 

  1  

NAME OF REPORTING PERSON

I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (ENTITIES ONLY):

 

            Mark Nelson and Dana Johnson, Joint Tenants with the Right of Survivorship

    
  2  

CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP:

(a)  ¨

(b)  ¨

    
  3  

SEC USE ONLY

 

    
  4  

SOURCE OF FUNDS:

 

            PF

    
  5  

CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e):

 

   ¨
  6  

CITIZENSHIP OR PLACE OF ORGANIZATION:

 

            United States

    

NUMBER OF

SHARES

BENEFICIALLY

OWNED BY

EACH

REPORTING

PERSON

WITH

  

  7    SOLE VOTING POWER:

 

                0

  8    SHARED VOTING POWER:

 

                4,075,100

  9    SOLE DISPOSITIVE POWER:

 

                0

10    SHARED DISPOSITIVE POWER:

 

                4,075,100

11  

AGGREGATE AMOUNT BENEFICIALLY OWNED BY REPORTING PERSON:

 

            4,075,100*

    
12  

CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES:

 

  

¨

 

13  

PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11):

 

            8.08% (based on the number of shares of Common Stock outstanding as of December 30, 2005)

14  

TYPE OF REPORTING PERSON:

 

            IN

    

 

* Neither the filing of this Schedule 13D nor any of its contents shall be deemed to constitute an admission by Mark Nelson and Dana Johnson that they are the beneficial owners of any of the Common Stock referred to herein for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, or for any other purpose, and such beneficial ownership is expressly disclaimed. 1,235,400 of such shares are owned by the Cantus Foundation (the “Foundation”), of which Mark Nelson and Dana Johnson are directors. The Foundation was created and funded solely by Mark Nelson and Dana Johnson. Mr. Nelson and Ms. Johnson have no direct pecuniary interest in the Foundation, but control the investment decisions of the Foundation.

Page 3 of 10

 

 

This Amendment No. 2 amends and restates in its entirety the Statement on Schedule 13D dated March 9, 2004, as amended, filed by Mark Nelson on behalf of Mark Nelson and Dana Johnson, joint tenants with rights of survivorship, with respect to the common stock, $.001 par value per share, of Palm, Inc., a Delaware corporation.

 

Item 1. Security and Issuer

 

This Statement on Schedule 13D relates to the common stock, $.001 par value per share (“Common Stock”), of Palm, Inc., a Delaware corporation (the “Company”). The principal executive offices of the Company are located at 400 N. McCarthy Boulevard, Milpitas, CA 95035.

 

Item 2. Identity and Background

 

(a) The name of the person filing this statement is Mark Nelson on behalf of Mark Nelson and Dana Johnson (the “Reporting Person”).

 

(b) The Reporting Person’s business address is 255 Long Ranch Road, St. Helena, CA 94574.

 

(c) The Reporting Person’s principal occupation is a private investor.

 

(d) During the past five years, neither Mark Nelson nor Dana Johnson has been convicted in a criminal proceeding.

 

(e) During the past five years, neither Mark Nelson nor Dana Johnson was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of which such person was or is subject to a judgment, decree or final order enjoining future violations of or prohibiting or mandating activities subject to Federal or State securities laws or finding any violation with respect to such laws.

 

(f) United States citizens.

 

Item 3. Source and Amount of Funds or Other Consideration

 

Personal funds in the amount of $92,758,396.

 

Item 4. Purpose of Transaction

 

The acquisition of the Common Stock was originally made solely for investment purposes, and not with a view towards influencing any extraordinary corporate transaction, any change in the Company’s board of directors or management, or any other change in the Company’s business, corporate structure or capitalization. The Reporting Person had a discussion on or about January 28, 2006, and from time to time after the date of this Schedule 13D may have additional discussions, with third parties or with management of the Company in which the Reporting Person may suggest or take a position with respect to potential changes in the operations, management or capital structure of the Company as a means of

Page 4 of 10

 

 

enhancing shareholder value. Such suggestions or positions may relate to one or more of the transactions specified in clauses (a) through (j) of Item 4 of Schedule 13D of the Exchange Act. On January 31, 2006, the Reporting Person sent a letter to the Board of Directors of the Company (the “Board”) expressing his views that the Board should consider a sale of the Company. The letter is attached hereto as Exhibit 1 and is incorporated herein by reference.

 

Item 5. Interest in Securities of the Issuer

 

(a) Mark Nelson and Dana Johnson, together with the Foundation, own 4,075,100 shares of Common Stock equivalent to approximately 8.08% of the Common Stock.

 

(b) Mark Nelson and Dana Johnson have the sole power to direct the vote of all such shares.

 

(c) The transactions in the Common Stock that were effected by the Reporting Person, in the open market by individual purchases, were the following:

 

  (i) Purchase by Mark Nelson and Dana Johnson of 43,800 shares at $10.21 per share on January 29, 2004;

 

  (ii) Purchase by Mark Nelson and Dana Johnson of 88,200 shares at $10.20 per share on January 30, 2004;

 

  (iii) Purchase by Mark Nelson and Dana Johnson of 240,452 shares at $10.14 per share on February 2, 2004;

 

  (iv) Purchase by the Foundation of 142,000 shares at $9.89 per share on February 23, 2004;

 

  (v) Purchase by the Foundation of 273,000 shares at $9.81 per share on February 24, 2004;

 

  (vi) Purchase by the Foundation of 61,136 shares at $9.70 per share on February 25, 2004;

 

  (vii) Purchase by the Foundation of 23,864 shares at $9.68 per share on February 26, 2004;

 

  (viii) Purchase by Mark Nelson and Dana Johnson of 5,776 shares at $9.71 per share on February 26, 2004;

 

  (ix) Purchase by Mark Nelson and Dana Johnson of 103,218 shares at $10.02 per share on February 27, 2004;

 

  (x) Purchase by Mark Nelson and Dana Johnson of 4,300 shares at $10.70 per share on March 3, 2004;

Page 5 of 10

 

 

  (xi) Purchase by Mark Nelson and Dana Johnson of 635,774 shares at $12.85 per share on March 4, 2004;

 

  (xii) Purchase by Mark Nelson and Dana Johnson of 190,784 shares at $13.65 per share on March 5, 2004;

 

  (xiii) Purchase by Mark Nelson and Dana Johnson of 187,407 shares at $14.01 per share on March 8, 2004;

 

  (xiv) Purchase by Mark Nelson and Dana Johnson of 341,300 shares at $13.57 per share on March 9, 2004;

 

  (xv) Sale by Mark Nelson and Dana Johnson of 20,000 shares at $13.61 per share on March 9, 2004;

 

  (xvi) Purchase by Mark Nelson and Dana Johnson of 178,993 shares at $13.36 per share on March 10, 2004;

 

  (xvii) Purchase by the Foundation of 99,700 shares at $13.21 per share on March 10, 2004;

 

  (xviii) Purchase by the Foundation of 14,700 shares at $14.36 per share on March 11, 2004;

 

  (xix) Purchase by the Foundation of 285,515 shares at $13.04 per share on March 15, 2004;

 

  (xx) Purchase by the Foundation of 27,500 shares at $14.30 per share on March 17, 2004;

 

  (xxi) Purchase by the Foundation of 72,585 shares at $14.36 per share on March 19, 2004;

 

  (xxii) Purchase by Mark Nelson and Dana Johnson of 98,000 shares at $18.91 per share on March 29, 2004;

 

  (xxiii) Purchase by Mark Nelson and Dana Johnson of 5,600 shares at $21.40 per share on March 31, 2004;

 

  (xxiv) Purchase by Mark Nelson and Dana Johnson of 110,000 shares at $21.16 per share on April 1, 2004;

 

  (xxv) Purchase by the Foundation of 12,694 shares at $20.99 per share on April 1, 2004;

 

  (xxvi) Purchase by Mark Nelson and Dana Johnson of 500 shares at $23.59 per share on April 2, 2004;

Page 6 of 10

 

 

  (xxvii) Purchase by the Foundation of 25,000 shares at $23.55 per share on April 2, 2004;

 

  (xxviii) Purchase by the Foundation of 30,000 shares at $22.87 per share on April 8, 2004;

 

  (xxix) Purchase by Mark Nelson and Dana Johnson of 115,896 shares at $15.98 per share on May 3, 2004;

 

  (xxx) Purchase by the Foundation of 2,306 shares at $15.96 per share on May 3, 2004;

 

  (xxxi) Purchase by Mark Nelson and Dana Johnson of 18,112 shares at $35.02 per share on July 16, 2004;

 

  (xxxii) Purchase by Mark Nelson and Dana Johnson of 68,355 shares at $40.93 per share on July 29, 2004;

 

  (xxxiii) Purchase by Mark Nelson and Dana Johnson of 69,550 shares at $40.39 per share on August 4, 2004;

 

  (xxxiv) Purchase by Mark Nelson and Dana Johnson of 25,000 shares at $39.35 per share on August 5, 2004;

 

  (xxxv) Purchase by Mark Nelson and Dana Johnson of 11,300 shares at $37.18 per share on August 9, 2004;

 

  (xxxvi) Purchase by Mark Nelson and Dana Johnson of 32,116 shares at $39.84 per share on August 10, 2004;

 

  (xxxvii) Purchase by Mark Nelson and Dana Johnson of 50,000 shares at $38.30 per share on August 12, 2004;

 

  (xxxviii) Purchase by Mark Nelson and Dana Johnson of 155,270 shares at $36.47 per share on August 18, 2004;

 

  (xxxix) Sale by Mark Nelson and Dana Johnson of 111,895 shares at $38.72 per share on August 25, 2004;

 

  (xl) Sale by the Foundation of 5,000 shares at $33.13 per share on August 31, 2004;

 

  (xli) Sale by Mark Nelson and Dana Johnson of 200,000 shares at $30.47 per share on September 14, 2004;

 

  (xlii) Purchase by Mark Nelson and Dana Johnson of 110,000 shares at $35.54 per share on September 23, 2004;

Page 7 of 10

 

 

  (xliii) Purchase by Mark Nelson and Dana Johnson of 246,000 shares at $42.44 per share on December 16, 2004;

 

  (xliv) Sale by the Foundation of 1,000 shares at $35.74 per share on January 16, 2005;

 

  (xlv) Purchase by the Foundation of 100,000 shares at $23.54 per share on February 23, 2005;

 

  (xlvi) Purchase by the Foundation of 65,000 shares at $22.90 per share on February 24, 2005;

 

  (xlvii) Sale by Mark Nelson and Dana Johnson of 13,000 shares at $24.24 per share on April 18, 2005;

 

  (xlviii) Sale by Mark Nelson and Dana Johnson of 89,800 shares at $23.82 per share on April 19, 2005;

 

  (xlix) Sale by Mark Nelson and Dana Johnson of 12,000 shares at $22.87 per share on April 21, 2005;

 

  (l) Sale by Mark Nelson and Dana Johnson of 189,006 shares at $22.46 per share on April 22, 2005;

 

  (li) Sale by the Foundation of 4,000 shares at $23.69 per share on April 19, 2005;

 

  (lii) Sale by Mark Nelson and Dana Johnson of 93,850 shares at $22.08 per share on May 2, 2005;

 

  (liii) Sale by Mark Nelson and Dana Johnson of 6,152 shares at $22.10 per share on May 6, 2005;

 

  (liv) Purchase by Mark Nelson and Dana Johnson of 100,000 shares at $28.36 per share on May 27, 2005;

 

  (lv) Sale by the Foundation of 6,000 shares at $27.89 per share on June 7, 2005;

 

  (lvi) Purchase by Mark Nelson and Dana Johnson of 126,000 shares at $30.28 per share on June 27, 2005;

 

  (lvii) Purchase by Mark Nelson and Dana Johnson of 53,000 shares at $29.71 per share on July 5, 2005;

 

  (lviii) Sale by the Foundation of 5,000 shares at $27.93 per share on August 1, 2005;

Page 8 of 10

 

 

  (lix) Purchase by Mark Nelson and Dana Johnson of 3,800 shares at $33.73 per share on August 29, 2005;

 

  (lx) Purchase by Mark Nelson and Dana Johnson of 4,500 shares at $33.35 per share on August 30, 2005;

 

  (lxi) Purchase by Mark Nelson and Dana Johnson of 500 shares at $33.49 per share on August 31, 2005;

 

  (lxii) Purchase by Mark Nelson and Dana Johnson of 22,500 shares at $33.77 per share on September 7, 2005;

 

  (lxiii) Purchase by Mark Nelson and Dana Johnson of 40,000 shares at $35.89 per share on September 14, 2005;

 

  (lxiv) Sale by the Foundation of 2,000 shares at $35.60 per share on September 14, 2005;

 

  (lxv) Purchase by Mark Nelson and Dana Johnson of 41,000 shares at $35.13 per share on September 27, 2005;

 

  (lxvi) Sale by Mark Nelson and Dana Johnson of 147,000 shares at $27.88 per share on October 3, 2005;

 

  (lxvii) Sale by Mark Nelson and Dana Johnson of 11,000 shares at $27.68 per share on October 13, 2005;

 

  (lxviii) Sale by Mark Nelson and Dana Johnson of 27,000 shares at $27.98 per share on October 14, 2005;

 

  (lxix) Sale by the Foundation of 2,600 shares at $26.67 per share on October 19, 2005;

 

  (lxx) Sale by Mark Nelson and Dana Johnson of 219,000 shares at $27.00 per share on October 26, 2005;

 

  (lxxi) Sale by the Foundation of 4,000 shares at $26.14 per share on November 10, 2005;

 

  (lxxii) Purchase by Mark Nelson and Dana Johnson of 24,000 shares at $27.01 per share on November 17, 2005;

 

  (lxxiii) Purchase by the Foundation of 43,000 shares at $27.03 per share on November 17, 2005;

 

  (lxxiv) Purchase by Mark Nelson and Dana Johnson of 36,000 shares at $26.85 per share on November 18, 2005;

Page 9 of 10

 

 

  (lxxv) Purchase by Mark Nelson and Dana Johnson of 128,000 shares at $26.25 per share on November 21, 2005;

 

  (lxxvi) Purchase by Mark Nelson and Dana Johnson of 10,400 shares at $27.59 per share on November 25, 2005;

 

  (lxxvii) Purchase by Mark Nelson and Dana Johnson of 20,000 shares at $33.57 per share on December 27, 2005;

 

  (lxxviii) Sale by the Foundation of 13,000 shares at $31.95 per share on December 28, 2005;

 

  (lxxix) Purchase by Mark Nelson and Dana Johnson of 234,000 shares at $36.05 per share on January 25, 2006;

 

(d) Not applicable.

 

(e) Not applicable.

 

Item 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer

 

None.

 

Item 7. Materials to be Filed as Exhibits

 

1. Letter dated January 31, 2006 from the Reporting Person to the Board of Directors of the Company.

Page 10 of 10

 

 

SIGNATURE

 

After reasonable inquiry and to the best knowledge and belief of the undersigned, the undersigned certifies that the information set forth in this statement is true, complete and correct.

 

Date: February 1, 2006

 

/s/ Mark Nelson

Mark Nelson

EXHIBIT INDEX

 

1. Letter dated January 31, 2006 from the Reporting Person to the Board of Directors of the Company.

EX-1 2 dex1.htm LETTER DATED JAN. 31, 2006 FROM THE REPORTING PERSON TO THE BOARD OF DIRECTORS Letter dated Jan. 31, 2006 from the Reporting Person to the Board of Directors

Exhibit 1

 

January 31, 2006

 

The Board of Directors

Palm, Inc.

950 W. Maude Avenue

Sunnyvale, CA 94085-2801

 

To the Board of Directors,

 

I am writing to you regarding what I consider critical issues that Palm is facing. As you are aware, I own approximately 7% of the company, via personal investment assets and those of Cantus, our private foundation. I take these concerns seriously, and I am sure you will as well.

 

The paramount issue is that Palm’s primary business is now in a segment of the computing/telecomm market historically characterized by an initial period of rapid innovation, market growth and attractive margins, inevitably followed by slowing innovation, commoditization and choked margins. Palm and the smartphone industry in general are in the upward part of this arc. Sales are robust, margins are expanding and the overall market is growing. Yet paradoxically, it is during this time that the Board should be looking beyond the current situation and considering the risks ahead. I believe the Board should begin exploring strategic alternatives, including a sale of the company, while Palm is in the ascendant. To dismiss the concerns raised here would be to ignore the substantial risks that Palm faces, exactly the sorts of risks from which shareholders rely on a board to shield them.

 

I confronted a similar situation in the late 90’s as CEO of Ovid Technologies, which I founded in 1988. Because of its product innovations, the company flourished, and went public (NASDAQ: OVID) in 1994. In late 1997, I became acutely aware of market forces that, in the future, had the potential to limit the company’s growth and affect its relatively generous product margins. At the time, Ovid was still growing revenues and profits. Nevertheless, with the Board’s approval, we hired Goldman Sachs, which negotiated a sale of the company at the end of 1998 for $200 million. As I had feared, subsequently the market for Ovid’s products stagnated and changing dynamics squeezed margins for Ovid and its competitors.

The abnormally large short position in Palm stock over the last year is a sign that many investors believe that Palm is extremely vulnerable to the issues raised here. Surprisingly, investors have established these short positions while Palm’s enterprise value/sales ratio remains substantially below that of its competitors: Motorola 1.5, Nokia 1.8, and RIMM 6.8, compared to 0.9 for Palm. Why would presumably savvy investors short a stock that already had such a low valuation if not for a belief that trouble lay ahead?

 

Palm faces significant risks in three main categories: competition, disintermediation and commoditization. The following lays out those risks in some detail:

 

Competition

 

While Palm has recently demonstrated rapid growth in the smartphone market and has established itself as one of the leaders in this segment, the company faces competitors who are larger and have significantly more leverage due to their market position, products and resources. Competitors (Research in Motion, Motorola, Nokia, Samsung, Hewlett-Packard, Siemens, Sony, Sanyo, HTC, and potentially Dell and Apple) are moving quickly in terms of product development and market penetration. These competitors can spread much of their R&D expenses across a broad array of products, both in higher-end smartphones and mid- and low-end handsets. Broader product lines also mean more leverage with carriers, the gatekeepers to the ultimate end users, and greater leverage in component purchasing. Moreover, these competitors can potentially sacrifice profits in the smartphone segment for the sake of greater market penetration.

 

Many competitors have established solid relationships with both international and domestic carriers. Palm has done relatively well domestically, but has made little progress internationally. It remains to be seen whether Palm can break down these international barriers. Similarly, some competitors have well-established relationships with large enterprise customers that have been built over many years and maintained by significant field resources. Because such competitors typically provide a wide range of products and services to a company, they can justify an expensive sales and support infrastructure. Palm cannot.

 

Motorola is a good example of a competitor that has much more flexibility in its pricing and margins. Motorola’s MOTO Q product has garnered very favorable reviews, and appears to be significant, near-term competition for the

Treo. Here is a company that can afford to undercut the Treo pricing in exchange for a carrier’s heavy subsidy and promotion of other products in its portfolio.

 

The success of the Ipod makes Apple a potentially powerful competitor. Apple is widely rumored to be working on a cellphone to be integrated into the Ipod. The Ipod’s immense popularity (over 42 million sold) would give Apple tremendous leverage with carriers. The Ipod already has rudimentary organizer features, and it is a short trajectory to a fully-featured smartphone. Apple’s hallmark has always been creative, sleek, and intuitive products—the exact traits of the Treo. An Ipod-like smartphone would prove fearsome competition.

 

Finally, carriers can engage HTC or a similar company to build a smartphone carrying their own brand and can afford to price it on a break-even basis (or worse) if the RPU is high enough. Cingular’s recent introduction of a $199 Windows-based phone, built by HTC and sold under the Cingular label, signals the beginning of this ominous trend.

 

These are just a few possible scenarios where Palm’s margins, profits and business could be severely jeopardized; certainly there are others. The point is that it is incumbent upon the Board to act now, before any of these scenarios materialize.

 

Disintermediation

 

A significant flaw in the smartphone business for Palm (and other suppliers) is that the supplier does not own the customer. Consequently, it cannot exert much control over the sale and distribution of its products.

 

As gatekeepers to the end-user, the carriers have influence in virtually every aspect of Palm’s smartphone business from product design, testing, and pricing to the relationships Palm has with competing carriers. What is best for the carrier will rarely be best for Palm. Certainly, carriers would welcome commoditization of feature-rich phones, because lower phone prices mean wider market penetration and ultimately increased usage RPU’s. Even though Palm can do some generic (i.e., non-carrier specific) product marketing, it must rely on the carrier for the majority of its targeted product marketing.

 

Disintermediation is unfortunate and often deadly for a company. Yet given current telecomm regulation, Palm has little choice in the matter.

Commoditization

 

It’s hard to dispute that Palm is in a business that will eventually be commoditized. Today’s robust margins indicate that commoditization has not yet occurred. Nonetheless, everything about this business points to commoditization, as Palm must know all too well given its recent experience in the PDA business. The cycle of boom and bust in the PDA business was caused by both commoditization and slack demand for the PDA’s. Palm had a relatively strong hedge against commoditization because it owned the operating system, the customer and the category-defining brand. None of those were strong enough to prevent commoditization. With smartphones, Palm is in an even weaker competitive position than it was in the PDA business.

 

A handful of companies in the Far East are already making the majority of smartphones, and some are even quite involved in designing them. It will be but a short while before we see smartphone clones. How can Palm compete against these? With the sale of PalmSource, it can no longer control the Palm OS. Embracing the MS platform may be necessary in terms of market acceptance, but it makes for a weaker hand in battling clones that also run Windows. Critics claim that without owning the software, Palm is just a box maker. Perhaps there is more truth in this than Palm acknowledges.

 

Commoditization is undoubtedly exacerbated by the lack of control over marketing and distribution. Brand recognition may even be regarded as a liability if a carrier believes it detracts from its own brand in any way.

 

Potential Acquirers

 

There are several competitors to Palm that would benefit greatly from an acquisition of the company. The benefits center on the potential of a competitor to leverage Palm’s market position and technology, and to fortify it against competitors. However, many of the potential economic and product synergies will diminish with time. The Board’s action and timing here are of equal urgency and importance.

 

Research in Motion’s complementary market position and internal infrastructure make it a good potential partner for Palm. RIMM must address its perception as a proprietary, single function (email) solution. Owning Palm would instantly broaden its reach into the enterprise and so-called “prosumer” market. Being able to provide products using industry-standard interfaces (Windows and Palm OS) would address the narrowness of its current offerings. It would also mean that third-party developers, who previously shunned the Blackberry platform, would now be working for RIMM rather than against it.

In addition, RIMM would be able to sell many more Treos through its well-established international network of partners, developed over the last 8 years.

 

Hewlett Packard has been struggling in the smartphone market, but clearly sees handheld computing as an integral part of its enterprise solution. There is large overlap between HP’s and Palm’s R&D, sales, and marketing efforts. An acquisition of Palm would provide HP with immediate presence and momentum in the marketplace. Another potential acquirer, Motorola, has been more successful than HP, yet would realize similar benefits as HP. Both companies would also benefit greatly from having the Palm OS available as part of their product line.

 

To date, Dell has done nothing in the smartphone market. Most believe that sooner or later it will recognize that the smartphone and handheld computing platforms have merged, and that, as more and more computing becomes mobile, competing in this space is a necessity. Dell has traditionally done very few acquisitions. Yet as its growth slows, it needs to find high-growth segments in which it can compete. To start building a smartphone business today would be too late, but an acquisition of Palm would provide it with instant market presence and clout.

 

(Microsoft and Nokia are two other potential but unlikely acquirers. Microsoft would face substantial regulatory hurdles, and Nokia apparently believes, rightly or wrongly, that its smartphone products are sufficient for it to compete.)

 

Apple is an ideal potential acquirer. It could add Ipod capabilities to the Treo line, and add Treo capabilities to the Ipod. It is safe to say that virtually every one of the 30+ million Ipod owners also has a cell phone. An integrated Ipod/smartphone would be of great appeal to current customers, and open up a broad new channel of users as well. Apple is striving to extend the Ipod to encompass video as well as audio; such a platform is the perfect complement for the Treo. In addition, Palm’s relationships with carriers would be of tremendous benefit to Apple in establishing its Ipod-centric smartphones.

 

The prospect of Apple competing in the smartphone space is a daunting prospect for Palm. But all players in the smartphone space should similarly fear it. RIMM, HP, Motorola and others will need to reassess their competitive portfolio and position in light of an entry by Apple into the market. For these companies, an acquisition of Palm makes sense both offensively and defensively.

For any acquirer, there would be obvious savings in the overlapping areas of sales, G&A, and research and development. Moreover, Palm’s chronic undervaluation makes the economics of an acquisition by a competitor very attractive. Even considering a sizeable acquisition premium, Palm’s low market capitalization would make a deal immediately accretive for almost any acquirer.

 

Conclusion

 

Despite current momentum, Palm will face significant threats to its business. When these threats materialize is debatable; whether they will occur is not. Palm CEO Ed Colligan is a solid leader, one who combines technical prowess, sales expertise and strategic vision. However, I believe overwhelming market forces will render insignificant steps this or any management can take. Now is the time for the Palm Board to act, while Palm still has category-leading products, marketplace momentum and a terrific balance sheet.

 

There are numerous competitors who could benefit immediately from acquiring Palm. As outlined above, these benefits include the potential to significantly reduce overlapping R&D expenses, to incorporate Treo technology into existing products and dramatically expand the reach of the Treo into international markets. Of course, one of the most substantial benefits for a potential acquirer is the ability to defend against other competitors.

 

The opportunity to realize these benefits will surely erode over time, as will shareholder value. It is imperative the Board act in a timely and decisive fashion before the opportunity to do so is diminished.

 

I welcome the chance to discuss these issues with the board at your earliest convenience.

 

Sincerely,

 

Mark Nelson

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