Motorola & Palm Inc.?
3-21-07: The Apple (AAPL) iPhone threat appears to be forcing the hands of Motorola. In the race to dominate the hand held market, Motorola is rumored to be interested in acquiring Palm Inc. If the deal does happen, the hand held market would change dramatically. Motorola will instantly be a major player within the hand held device market. Recent trend suggest the market is headed towards a device that can perform multiple functions like the Palm Treo. In today’s market, a phone is no longer just a phone; it needs to be able to play MP3, surf the web and be a mini computer (at the very least!). Let’s look at the scenario more closely.
In our view, such a merger would help Palm Inc. and MOT better compete moving forward. The most obvious is Palm will benefit from the sales, marketing and distribution channel of Motorola. Most importantly, it would help Palm retains its lead in the hand held market; MOT will have a new revenue stream. Motorola would also benefit as PALM will provide the company a new platform to sell and build upon. The company current lack catalyst, Palm could be it (if the deal happens).
This deal however goes beyond the hardware, the mobile Operating Systems is also at the heart of the issue. The MacOS could very well dominate the industry if Apple iPhone takes off as expected. Similar to how the iPod now controls the MP3 player market; the same can happen with the hand held market if the “Windows OS” camp does not take action. The very thought of Apple domination is probably what is prompting the move to acquire Palm. Desperate as it may appear, the deal could be the only way to effectively compete with Apple.
The question before us today is should investor buy Palm or Motorola? Palm’s share has been going up in the last two weeks, now trading near $20 per share. This is approximately 35% from the start of the rumor. Some have guessed Motorola might be willing to pay up to $25 per share for PALM. However, the consensus is the most MOT will pay is $20 per share. In our opinion, MOT will likely pay $22 per share. Therefore, further upside of PALM stock is limited. If you decide to enter PALM at this level, be aware that the stock is trading based on speculation. If the deal falls through, PALM will likely be back to where it was.
In the long term, MOT is the company to buy. We like MOT at the current level ($17-$18 per share) as we firmly believed the stock is undervalued. There will likely be management shake up and potentially layoff in the near term, but this is to be expected as the company needs to clean house and refocus. Therefore, expect MOT to be volatile in the short term. However, long term view, we believed MOT will eventually get its act together and the stock should be in the high 20s, perhaps mid 30s.
Comments
Just vote for Icahn when you get his gold card and get rid of Zander.
Posted by: Ron Mexico | March 21, 2007 05:58 PM