Dear Dell, Go Talk to Palm

Mr. Michael Dell
Chief Executive Officer
Dell, Inc.
One Dell Way
Round Rock, Texas 78682

Dear Michael:

With the advent of the Apple (AAPL - commentary - Cramer's Take) iPhone in 2007 and its subsequent imitators, it has become apparent that we're seeing "computing" evolve once again. Phones are no longer just something you speak into. They have transformed into a portal for taking the Internet wherever you go.

I realize that you have been busy the last couple of years trying to right the good ship Dell (DELL - commentary - Cramer's Take), but your lack of participation in this market segment will hurt the company going forward. There is another rumor making the rounds that you've been feeling out suppliers in an attempt to enter the market at some point. While, if this is true, I'm glad to see some movement on this front, I fear that this approach is doomed to fail.

Let me be so bold as to suggest that there is a ready-made solution for you that I recommended nearly two years ago: Dell should buy Palm (PALM - commentary - Cramer's Take). Think about it, Michael -- it's a match made in heaven. You get a solution, and they get the stability, influence and purchasing power of Dell.

Palm obviously has a history in the smartphone space and, while its product line was admittedly aging, the new Pre caught a lot of positive press at the Consumer Electronics Show a few weeks ago. Despite having an interesting new platform and operating system, Palm is going to have two big hurdles to overcome, and that's where you can help.

• The first relates to the fact that the new operating system does not support any of the old applications. Consequently, Palm is going to have to attract software developers to its new platform. That will be a little more difficult than it has been in the past, given the amount of new competition in the space. But with the Dell brand behind the product, I believe there would be an increased level of confidence that the Pre will succeed. And if you want to throw in some financial incentives to the developers, that would be a good idea too.
• The second area that you could help with is distribution. Let's face it, when the Pre actually shows up, it really needs to be everywhere on day one. I know that's not going to happen, but it will give you an idea of how difficult the task is going to be. Obviously, Dell already has a worldwide distribution channel and is also developing relationships with retailers. I know Palm will claim the same thing but realistically with iPhone, Storm, Android, et al., all vying for the ears of service providers, it's not going to be easy. Being part of the Dell family would be a huge boost to Palm.

Elevation Partners, Palm's financial backers, has about $425 million tied up in this investment thus far. Obviously, no one was counting on the company having to "go to the well" for another $100 million in December, but that suggests just how difficult the market has become. While the rebound in the stock price over the last 30 days has been comforting, the first $325 million convertible is still underwater with an $8.50 conversion price.

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At the time of publication, Faulkner had no positions in the stocks mentioned.

Bob Faulkner has been in the investment business for 18 years with an exclusive focus on technology stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Faulkner appreciates your feedback; click here to send him an email.

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