PalmSource Deal Fuels Takeover Talk

Shares of PalmSource (PSRC Quote) got a shot in the arm on Tuesday when former corporate sister PalmOne(PLMO Quote) renewed a licensing agreement with the company, fueling speculation the two companies would ultimately merge.

Under the deal, which runs through 2009, PalmOne will pay a minimum royalty of $148.5 million to PalmSource. The deal extends a previous agreement that was set to expire in November 2006.

In a separate agreement, palmOne is buying from PalmSource its rights to the Palm brand for $30 million. After that deal, palmOne will change its name back to Palm later this year.

In the wake of the announcements, shares of PalmSource were recently up $1.28, or 14.4%, to $10.17.

PalmOne shares also seemed to get a boost from the deals, rising $1.39, or 5.1%, to $28.65.

Over the weekend, PalmSource CEO David Nagel resigned and was replaced on an interim basis by Patrick McVeigh, the company's former head of worldwide licensing. But Nagel's resignation was only the latest leadership change for the company. In the past year, PalmSource has replaced its CFO and its chairman and named two new board members. McVeigh himself just joined the company in February.

Citing the management turnover, Fulcrum Global Partners analyst Jamie Friedman said that PalmSource could be an acquisition target. And PalmOne could be the most likely buyer. Subtracting the cash the company has on hand, PalmSource has an enterprise value of somewhere around $75 million, Friedman estimated. That's a whole lot less than the nearly $150 million that PalmOne has just agreed to pay PalmSource, he noted.

"You don't have to be a math major to figure this out," said Friedman, who doesn't have a position in PalmSource and whose firm doesn't do investment banking. "It's cheaper to marry than to date."