A Nokia-Palm Deal? No Way, Say Analysts

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LONDON (Dow Jones) Some partnerships like romances just aren't meant to be.

That was essentially the message several industry observers conveyed on Tuesday when asked whether it would make sense for Nokia, the world's largest mobile-phone maker, to acquire struggling smart-phone and handheld organizer pioneer Palm.

"We do not believe that Palm holds any significant attraction for Nokia and see no reason why Nokia would want to acquire it," said Richard Windsor, a London-based analyst with Nomura International.

Carolina Milanesi, a principal analyst in Gartner's mobile-devices team, was even blunter.

"This doesn't make any sense," she said, stressing that buying Palm would be a huge strategic about-face for Nokia, which uses the Symbian operating system in its enterprise devices as opposed to the Palm and Windows Mobile platforms used by the U.S. company.

Speculation that Nokia may be mulling a Palm purchase flared on Monday following a report in the Wall Street Journal that the Sunnyvale, Calif.-based company has hired Morgan Stanley to advise it on its strategic options.

There's no doubt that Palm is at a crossroads.

Not only does it face increased competition from experienced phone maker such as Motorola and Nokia in the enterprise segment, it will also soon have to fend off new entrants to the smart-phone market including Apple with the iPhone and Dell.

Smart phones combine the features of a cell phone, personal organizer, as well as Internet access and e-mail in one handheld device.

Nokia, Motorola and BlackBerry maker Research In Motion all recently unleashed sharp-looking new handsets that have blunted Palm's historic edge in device design and forced it to slash prices.

In its most recent quarter, Palm reported a 12% drop in revenue and warned of weaker sales to come.

Still, its devices have significant traction in the U.S. According to research from NDP Group, the top five sellers in the U.S. smart-phone market in the August through October were Motorola's Q followed by Palm's Treo 650, Verizon Wireless' XV6700, Palm's Treo 700p and the BlackBerry 8700.

However, that listing illustrates what analysts say is another Palm weakness: its over-reliance on a single model, the Treo, which accounts for over 60% of its revenue.

"While there are three versions of the Treo and it operates on cellular standards, the product line is in many ways a single offering," Casey Ryan, an analyst with Nollenberger Capital Partners, told clients in a recent note.

"If the Treo line becomes unpopular, or if a competitor successfully mimics the Treo and wireless carriers lose interest in the product, Palm's results are likely to be negatively impacted," Ryan warned.

In the first half of 2006, Nokia accounted for 42% of the combined worldwide PDA and smart-phone market. In the same period Palm had 5% of the market, down from 8% in the year-earlier period, according to data provided by Gartner. RIM had 6.5% of the market and Motorola 5.3%.

Palm shares are up 17% since the beginning of the year as of Monday's close.

A stand-alone strategy

Meanwhile Palm Chief Executive Ed Colligan only last month told MarketWatch in an interview that the company intended to keep going it alone. He also insisted that Palm's focus on function over design remains a key asset in the enterprise segment.

Yet observers say that solitary stance is a fast-receding option.

"It's getting harder for them, particularly in Europe. In the U.S. the story is slightly different, but I'm not sure it's enough of a market for them to maintain their level of revenue," said Gartner's Milanesi.

And while she doesn't see Nokia as a good strategic fit, explaining that the Finnish company's use of the Symbian operating system is actually a useful differentiating tool in the enterprise market, she believes a Palm deal could make sense for a computer player without a core competence in handset manufacturing, such as Dell.

Motorola, Samsung and many other operator-branded smart phones use Microsoft's Windows Mobile operating system. One of the platform's key advantages in the enterprise arena is that it doesn't require a company's IT department to put in any new infrastructure.

Nokia has so far stuck to its consumer-oriented Symbian platform, which Milanesi sees as a benefit.

"As much as some people may criticize the Symbian operating system as an enterprise platform, it allows Nokia to differentiate itself from the myriad of players entering the field with Windows Mobile," she said.

Palm has recently adopted a dual strategy and it manufactures devices using either the Palm interface or the Windows Mobile one.

Regarding Palm's proprietary operating system, Milanesi doesn't believe it has much a future. Rather, she sees the company incorporating its best features into the Windows Mobile platform.

Others, like Ilkka Rauvola, a telecoms analyst with Finland-based Evli Bank, are slightly more positive on Palm's proprietary operating system, saying some aspects of that interface could be of interest to Nokia.

But even Rauvola remained cautious, stressing that, because Palm has been losing market share for some time, the attraction is limited. "I don't know if what they represent today would fit Nokia's mindset," he said.

He added, however, that the financial cost of a deal wouldn't be a problem for Nokia. Analysts have estimated Palm to be worth around $1.6 billion.

(END) Dow Jones Newswires"

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Tags: windows mobile  wall street journal  gartner  dell  palm  rim  research in motion  symbian  morgan stanley  myriad  nokia,  pioneer  pda 

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