Palm Loses Takeover Allure

The shares gave back nearly all of Friday's gains on Monday after a JP Morgan analyst poured cold water on deal speculation

Is Palm (PALM) in play, or not? The Sunnyvale (Calif.) maker of handheld devices like the popular Treo smartphones enjoyed an 11% runup in its share price on Friday, Mar. 2, amid speculation that either Motorola (MOT) or Nokia (NOK) may acquire the company to bolster their competitive position in the wireless enterprise market against Research in Motion (RIMM).

A Mar. 5 Wall Street Journal report seemed to up the ante, indicating that the company had retained Morgan Stanley to evaluate strategic moves including a potential sale of or a private equity investment in the company.

But investors appeared to curb their enthusiasm on Mar. 5 as they reassessed the likelihood of such a deal -- and as one Wall Street analyst poured cold water on takeover notions. Palm shares fell nearly 10% on Mar. 5 to $16.50, just about erasing the gains from Friday's speculation-fueled frenzy.

A Palm spokeswoman wouldn't comment on Mar. 5 on the Journal reports, according to the Associated Press.

Palm is up against some tough competitors in a fast-changing marketplace, including RIM's BlackBerry Pearl, and its revenues have disappointed investors over the past few quarters (see, 9/6/06, ). Another worry: The aging design on its Treo device. The Treo's look hasn't substantially changed since it was introduced more than three years ago.

JP Morgan analyst Paul Coster cited the long-in-the-tooth Treo in downgrading his rating on the shares on Mar. 5 to underweight from neutral, according to a Standard & Poor's MarketScope report. Coster thinks the risk-reward trade-off for the stock is now unfavorable. He is skeptical that a takeover of the company is pending, and that any such deal could happen at a significant premium to where the stock has been been trading.

Standard & Poor's equity analyst Richard Stice had a more positive take on the shares, lifting his target price on the stock on Mar. 5 by $4 to $18. "We think Palm's name brand and financial structure, with $5 per share in net cash and short-term investments, are attractive features for potential suitors," he wrote in a research note. Stice also thinks the recent introduction of its Treo 750 product line is "an additional positive catalyst" for the stock. The analyst reiterated his hold recommendation on the shares. (S&P, like, is a unit of The McGraw-Hill Cos. [MHP]).

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