'Shotgun wedding' for Palm and Handspring

After years of lacklustre interest in merging with Palm, Handspring had a change of heart at the beginning of this year, culminating in yesterday's deal which some are equating with a 'shotgun marriage'.

In one of the most high-profile mergers in the handheld space, a number of industry watchers say the deal comes as no surprise and it should have come sooner. But what seems logical to others was an issue of timing for Handspring, say sources familiar with both companies.

"There were exploratory talks with Handspring over the years, but everyone involved could see that on the Donna side of things, things would not come easily or early," said one source, who attributed the delays to lingering ill will between Handspring CEO Donna Dubinsky and Palm CEO Eric Benhamou.

In 1998, Dubinsky and Palm founder Jeff Hawkins oversaw the Palm unit for networking company 3Com, where Benhamou served as chief executive at the time. But Dubinsky and Benhamou had professional differences in how the handheld maker fit into the larger networking company and the timing of spinning off the young company in an initial public offering, said Allen Bush, a Handspring spokesman.

"I wouldn't say Donna was dragging the [Palm] merger process. It's just that early on they were more direct competitors," Bush said. "Since that time, 100 per cent of our focus is on smart phones, and Palm is innovating on the handheld side."

He added the decision to merge was also based on the new management team for Palm's hardware unit, Palm Solutions Group. Handspring will be merged with Palm Solutions, and Palm's software division, PalmSource, will be spun off in July.

"The management team at Palm has changed over the years and the team that is in place now is different and has proven its ability to make a great business," Bush said.

"This merger was not our only choice. We had another round of financing we could have gotten," Bush said. "That funding would have been enough to execute on the business plan going forward, but the merger with Palm was a better long-term strategic path."

But Handspring's financial situation also played a role in its willingness to merge, sources said. The company was facing widening losses, declining revenue and a need to seek additional funding sources. In January and February, Handspring became receptive to serious merger discussions with Palm, several sources said.

"Handspring needed to think about what it should do for funding in order to execute on its business plan," said another source, who noted Handspring never actively shopped itself around for a buyer.

And while the two companies had maintained a long relationship over the years, with Handspring licensing the Palm operating system, the deal was no slam dunk.

Even though Palm had been pursuing Handspring, once the casual talks turned serious, the market leader Palm had some concerns it wanted to explore.

"Palm was concerned whether the merger would keep them out of better deals later on," another source said. "And they were concerned with the speed to market (with their products) and integration of the companies."

The source added: "The question for them will be can they rapidly integrate their companies and go to market with something much bolder than what each of them has done in the past."

Dawn Kawamoto writes for News.com