Palm to acquire Handspring

Palm has said it will buy rival Handspring in an effort to strengthen its grip on the market for handheld devices.

Palm, which also announced that it has finalised plans to spin off its PalmSource software division, will purchase Handspring in a stock deal.

The transaction will grant Handspring stockholders 0.09 of a share of Palm - and no shares of PalmSource - for each share of Handspring common stock. Based on Tuesday's closing price, that values each Handspring share at $1.09, slightly lower than Handspring's closing price of $1.11.

The deal is expected to close this autumn, after the spin-off of PalmSource. Palm Solutions Group, the company's hardware arm, will then merge operations with Handspring, creating a new hardware company with a new name.

By adding Handspring's Treo hybrid mobile phone/PDA to its own line of Palm personal digital assistants (PDAs), Palm believes it can create a much broader product line, giving it an advantage in the market. The company also gains access to Handspring's technology and the company's relationships with resellers and mobile service providers.

Palm is the number one seller of PDAs but the company has been hit by slowing demand for handhelds and increased competition from new entrants, including Dell. PDA shipments were down 21 per cent during the first quarter, according to IDC. Shipments have been slumping for the past few quarters.

The deal also brings full circle the relationship between the two companies. Handspring founders Jeff Hawkins - who invented the first Palm handheld - and former CEO Donna Dubinsky established Palm in 1992, and were the top names at the company until they left in 1998 to start Handspring. Handspring became one the first outside companies to license Palm's operating system.

Hawkins and Dubinsky will become part of the new management of the combined company and are expected to help lead the company toward its new goals. With the PalmSource software operation running on its own, Palm - now a hardware company - will focus on bolstering its brand and its market share in the handheld market.

The deal also marks the end of Handspring's struggles. The company enjoyed strong sales of its PDA products but saw a string of quarterly losses as it tried to make a transition away from PDAs to focus only on the Treo.

In addition, the deal helps Palm to fend off Microsoft. Though Palm remains the leading seller of PDAs, products based on Microsoft's Windows CE operating system - including its Pocket PC software - have been steadily gaining market share over the past few years. Microsoft has also launched software that extends Pocket PC to hybrid PDA/cellular devices.

Palm expects to save approximately $25m annually after the deal, a result of increased manufacturing volumes and the elimination of overlapping programmes.

However, part of those savings will come from job cuts. Palm expects to reduce its overall work force by 125.

John G Spooner writes for CNET News.com.