Palm Shareholders OK a Marriage of Desperation

The new Palm-Handspring entity will face tough competition from the likes of Hewlett-Packard(HPQ Quote) and Dell(DELL Quote) on the PDA side. And in smart phones, the real growth market, palmOne will have a hard time competing with big sharkish rivals.

Competitors like Nokia, Samsung and Motorola(MOT Quote) can afford to invest in R&D at a rate the combined palmOne entity will be hard put to match, he adds.

The tough growth picture is clearly evident in Palm's August quarter, in which sales grew only 3% above last year's levels to $177 million, falling short of analyst expectations for $184 million.

In the third quarter, the worldwide market for handheld gadgets or personal digital assistants grew by a mere 1.1% -- which counts as progress, given the preceding two quarters in which sales were below last year's levels. But IDC analyst Alex Slawsby says the growth was likely a one-time boost prompted by the debut of five new H-P devices, rather than the start of any broader upturn.

Even assuming the economy continues to recover and companies start to increase their IT spending, the likely beneficiaries will be vendors of smart phones rather than PDAs, he adds.

To be sure, Handspring has won kudos for its new Treo 600, a combination phone and PDA. On the strength of those sales, Handspring could potentially show decent growth, particularly given its much-diminished revenue base.

In the September quarter (which didn't really reflect sales from Treo 600, which started shipping in the last two weeks of September), Handspring garnered sales of a mere $13.1 million, down from $54.1 million a year ago.

Yet Handspring's sales as of the most recent quarter were equivalent to a mere 7% of Palm's revenues -- meaning success with the new Treo line won't necessarily have a huge impact at palmOne.