Takeover Talk Has Pushed Palm Shares To Lofty Valuation

SAN FRANCISCO (Dow Jones) - Rumors of a potential takeover deal have pushed shares of Palm up nearly 35% in the last six weeks - to the point where many on Wall Street wonder how much upside could be left in the stock even if Palm is acquired.

Palm has been on the rise since early February, when reports first began to surface that the company may be a takeover target. On Tuesday, the stock topped the $19 mark for the first time since May. The shares gained another 3% in Wednesday trading.

After their recent gains, Palm shares are now trading at roughly 30 times estimated earnings for the next four quarters, which is 44% above its average price-to-earnings multiple over the last five years, according to Thomson Financial data.

"To my way of thinking, there's not a whole lot left to go up from here," said Casey Ryan, an analyst at Nollenberger Capital Partners.

"If the stock goes above $20, it's probably beyond what people wanting to buy it would be willing to pay," said Ryan, who downgraded Palm to a neutral rating on March 5, when the stock moved past his $17 price target. Two other brokers have also downgraded the stock during the past month.

To be sure, an acquirer may yet offer more for the company. The bullish trading on Tuesday followed a report on the Web site Unstrung.com that Palm was close to signing a deal and intended to have the details finalized by Thursday, when it reports results for its third fiscal quarter.

Many of the rumors that have swirled around Palm have pointed to larger wireless-gear makers such as Motorola Inc. and Nokia Corp. as potential suitors.

Motorola in particular has been a favorite target of speculation. The embattled handset maker has been in a slump since early January, when it warned that sales of its latest, high-end phone models failed to offset falling prices of its popular RAZR line.

Yet at its current level, Palm's stock is trading above nearly every price target set by Wall Street analysts. Current targets range from a low of $12 to a high of $20, with the median set at $14.50, according to Thomson Financial.

Palm's current valuation is on par with its main rival Research in Motion, maker of BlackBerry wireless e-mail devices. Unlike Palm, however, which saw its earnings slide in its last reported quarter, RIM has been on a tear, with profits growing 49% in its most recent period.

"If you're in a normal operating environment, RIM should definitely be trading at a premium" to Palm, said James Faucette of Pacific Crest Securities. "I do think that is an indication that the value [of Palm] is reaching the peak of where it can go," said Faucette, who rates RIM shares outperform and Palm shares market perform.

Stoking the rumor mill

The decision by Motorola CEO Ed Zander to abruptly pull out of a planned keynote address at CTIA Wireless, the industry's largest gathering that is taking place next week in Orlando, Florida, has helped stoke the rumor mill. The company has cited scheduling conflicts as the reason for the move.

Ryan noted that Motorola would be under enormous pressure if it tried to undertake an acquisition of Palm. Investor activist Carl Icahn has been buying its shares and campaigning for a board seat, while pushing the company to use its cash to buy back shares.

Meanwhile, Motorola's depressed share price could make an all-stock transaction less attractive for Palm shareholders.

"If Motorola were to pay a really big premium for Palm, they would probably get a really negative reaction," Ryan said.

Meanwhile, several analysts have dismissed outright the notion that Nokia would buy Palm, given that the companies use different operating systems on their devices that would limit their ability to integrate the two product lines.

In a note to clients Wednesday, Paul Coster of J.P. Morgan said that Palm suffers from "dated" technology, a long product cycle and heavy price competition.

"With this in mind, we would view an acquisition by Nokia or Motorola as an indictment of the smart phone strategies of either of these potential acquirers, possibly signaling their concerns that RIMM is winning share in the highest margin subset of the mobile handset market," Coster wrote.

(END) Dow Jones Newswires"

Posted to the site on 21st March 2007