Palm Faces Challenges Despite Influx Of Apple Talent

NEW YORK -(Dow Jones)- After a strong run, Palm investors looking for further gains may need to exercise patience despite the arrival of two Apple veterans.

Private-equity firm Elevation Partners' decision to buy a 25% stake in the smart-phone maker and the expected $940 million dividend payout provided a shot in the arm for the stock Monday, which had already been lifted by persistent takeover rumors. Critics, however, believe Palm will have difficulty overcoming its near-term obstacles, even if guided by the man who oversaw the development of the trend-setting iPod digital music player.

"Investors expecting a quick improvement in the company's product portfolio, based on the arrival of new executives, could be disappointed," warned Oppenheimer & Co. analyst Lawrence Harris.

The deal, which calls for Elevation to invest $325 million in Palm, values the company at $17.50 a share, or 24 times analysts' average earnings estimate for fiscal 2008.

Palm shares recently traded at $17.49, up $1.40, or 8.7%.

In comparison, Motorola shares trade at 20.9 times the 2008 earnings estimate, and Research in Motion shares trade at a multiple of 34.7. Both are far larger companies than Palm.

Following the completion of the deal, Palm will tap Jon Rubinstein to serve as chairman and run product development for the company.

His arrival comes at a difficult time for the Sunnyvale, Calif., company, which is facing more challengers to its Treo line of smart phones. Samsung Electronics has performed well with its Blackjack device, while Motorola has its Q. RIM's Blackberry has done well on the strength of its consumer-oriented Pearl device. Apple, meanwhile, is waiting in the wings with its eagerly anticipated iPhone slated for release in late June.

Palm stands at a disadvantage because it is virtually tied to the fate of the Treo and has few other products aside from an aging personal digital assistant business. With other handset makers offering a vast array of mobile devices, it's vital for Palm to release new hardware and software.

"Ultimately, these handset stocks are determined by new product and product cycles," said UBS analyst Maynard Um.

Yet Palm's latest product, a "mobile companion" device called Foleo that is the brainchild of founder Jeff Hawkins, was met with tepid reaction.

The company is working on a new operating system and common platform that will allow it to bring out new products faster, but there are few details. Despite the new board members and the influence of Apple alumni, the current product road map won't change, President and Chief Executive Ed Colligan said in an interview with Dow Jones Newswires. "We're going to deliver on our commitments to our shareholders. That involves delivering on our road maps."

Colligan said that any next-generation product Rubinstein works on won't show up for at least another 18 months. Nonetheless, Colligan said he should immediately affect the company by ensuring its engineers work more effectively.

"Can he help us in the short term to be more efficient and effective? Yes," he said.

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Rubinstein served as the former head of hardware for Apple and helped oversee the development of the iPod. Analysts lauded the move to add him, former Apple Chief Financial Officer Fred Anderson and Elevation founder Roger McNamee to the board.

"Palm replaced two former board members with three Silicon Valley luminaries," said ThinkEquity Partners analyst Jonathan Hoopes, but added, "It will take a couple of years to get this thing going."

McNamee said he believes Palm is in a similar place that Apple was before it hit upon its resurgence following the success of its personal computers and the iPod. Apple shares have risen consistently over the past four years, from slightly above $10 at the end of 2003 to its recent price of $120.68.

Anderson helped usher in Apple's current hot run. But his legacy was tainted when he resigned from the board following an investigation into its stock-option granting practices late last year. He settled with the Securities and Exchange Commission and made no admission to or denial of the claims.

McNamee defended Anderson. "Fred's experience at Apple included a period of focused product development and growth directly analogous to what we believe Palm will experience in the next few years," McNamee said.

-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com

(END) Dow Jones Newswires"

Posted to the site on 4th June 2007