palm inc. shares/What does Harbinger Capital know about Palm?

[si tacuisses]

"What Does This Hedge Fund Know About Palm? "

summary: "It might know that Palm is too valuable for HTC to pass up."

PALM

Palm, Inc.

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While two Wall Street analysts have decided that Palms (Nasdaq: PALM) shares are worth as much as a limited-edition Tyler Green rookie card (which is to say, nothing), one big hedge fund has a very different opinion. Maybe this fund knows something about Palms future that the rest of us dont, bus also possible that it just understands a fact that many other investors are also aware of: Palm can still be pretty valuable in the right hands.

The news of Harbinger Capitals giant stake in Palm, which stood at 9.48% at the end of March, comes when Wall Streets sentiment toward the company has turned deeply negative. Not only have Morgan Joseph & Cos. Ilya Grozovsky and Canaccord Adams Peter Misek given Palm a price target of $0, but only two of the 28 analysts covering the company (according to Thomson/First Call) rate its shares a buy. If I thought Palm would continue trying to slug it out in a fiercely competitive smartphone market, I might agree with the pessimists. But since the company has already hired Goldman Sachs to help it find a buyer, it looks as if Palm has resigned itself to being another storied tech pioneer that couldnt stay independent anymore. And in that context, I think the company is anything but worthless.

I think the best historical comparison here is IBMs (NYSE: IBM) 2005 sale of its PC division to Chinas Lenovo Group for $1.75 billion. Like Palm, IBMs PC division was both bleeding cash and losing market share to hungry competitors, a situation that led some to think the business couldnt be sold. But also like Palm, the unit had smart engineers, some well-known brands, a strong patent portfolio, and a decent North American presence. Put into the hands of a low-cost Asian manufacturer such as Lenovo, those assets ended up being pretty valuable: Gartner estimated that Lenovos global PC market share stood at 8.3% in the first quarter, up from 6.6% a year before, and good for fourth place overall.

Why HTC needs to act
So which company can play the role of Lenovo for Palm? Like my colleague Rich Smith, Im skeptical that itll be Lenovo itself. But I think either Huawei Technologies or HTC could work. Both companies have been rumored to covet Palm, have the cash to pull off an acquisition, and could quickly bring down the companys manufacturing costs. But while Huawei could benefit from buying Palm -- especially if it gets Palms engineers working on some good Google (Nasdaq: GOOG) Android phones -- HTC simply needs to make a deal happen, for a few reasons:

* HTCs smartphone lineup gets an immediate branding boost. To put it mildly, HTCs brand power isnt at the same level as that of Apple (Nasdaq: AAPL) or a Nokia (NYSE: NOK). Perhaps Palms brand isnt, either, but the companys legacy does give it some additional value.
* Palms technology could be ported to HTCs existing phones. HTC has had some success in differentiating its Android and Windows Mobile phones from the pack through its Sense user interface. But integrating some of the neat features in Palms webOS operating system, such as its live application previews and cascading notifications, would take the company much further.
* Apple, Apple, Apple. Theres a big reason Steve Jobs chose to send his lawyers after HTC instead of, say, Motorola (NYSE: MOT) or Samsung: Those companies could probably sue Apple for patent infringement as easily as Apple could sue them. With Palms patents in the picture, Jobs might have a weaker hand against HTC going forward.

Palms hopes for reliving its glory days as a smartphone leader may be shattered, but this doesn't mean a company such as HTC won assign it a price tag well north of $0.

Im guessing that Harbinger Capital is well aware of that.