Palm Shareholders OK a Marriage of Desperation

Palm(PALM Quote) gave a thumbs-up to the company's plan to spin off its software arm and merge its hardware business with that of rival Handspring(HAND Quote).

The spun-off software company will be known as PalmSource, while the Palm-Handspring hardware entity will go by the name of palmOne. The two will begin trading respectively on Nasdaq under the tickers PRSC and PLMO tomorrow.

While the merger and spinoff create some momentary light and heat around the stock, the moves gave off a whiff of desperation, as big-cap competitors threaten to shoulder Palm aside.

Under the terms of the deal, Palm shareholders will receive about 0.31 shares of PalmSource for each share of Palm they own, while Handspring stockholders will receive 0.09 palmOne shares for each share of Handspring common stock. In Tuesday trading, Palm shares closed up $1.64 or 6.4% to $27.24.

Yet despite the warm market reception to the news, many onlookers say it's hard to get too excited about a deal between two players in a shrinking market. Despite buy-side interest, a number of analysts cast the union as a tactical response by Palm and Handspring to fend off irrelevance, rather than any bold stroke to regain momentum and growth.

They say the two companies, which climbed to prominence as leading players in personal digital assistants, have fallen too far behind in the emerging smart-phone market. And they're likely to have a hard time catching up, given rapid strides in the space by rich, giant players such as Nokia(NOK Quote) and Microsoft(MSFT Quote).

Granted, there's been a fair amount of buy-side interest in Palm since the deal was announced. Prior to the merger announcement, retail investors accounted for 70% of Palm's stock ownership, with institutional investors holding only 30%. But money managers have upped their stakes and now account for a full 50% of the pie, according to the company.