Palm Plunges After Calling Off Merger Deal, Slashing Guidance

Updated from 4:46 PM

Palm (PALM) Thursday slashed its fourth-quarter revenue outlook and called off its merger with Extended Systems (XTND). Shares in rival handheld-device makers plunged in after-hours trading.

Trading in Palm was halted after the close of regular business on the Nasdaq. Shortly thereafter, the handheld-device maker said fourth-quarter revenue would amount to $140 million to $160 million, half of its previous forecast and less than half of the year-ago $350 million. Palm blamed a delay in shipping its new m500 family of handheld computers and made the obligatory references to the slowing economy.

Palm announced the new line before it was available, likely stalling sales to consumers who decided to hold off purchases until they could see the new models. Analyst Bill Crawford of U.S. Bancorp Piper Jaffray agrees that at first glance, this appears to be an "inventory and transition problem." His company does no investment banking for Palm.

Handspring (HAND) fell 12% and Research In Motion (RIMM) dropped 7% in postclose trading on Instinet after the announcement.

Palm expects to double its projected loss to the $170 million to $190 million range, and will take a $300 million writedown to patch over its component woes. Palm's third-quarter revenues hit $471 million.

Palm agreed to acquire Extended Systems on March 6, three weeks before its March 27 warning of a fourth-quarter loss on reduced revenue. That news sank Palm's share price from its merger-friendly $22 to Thursday's pre-halt level of $7.05. Extended Systems shares did the same, falling from $23.13 on the day of the merger announcement to $9.94 Thursday. Below a $16.60 barrier, Extended Systems would have been able to trade one of its shares for 1.325 of Palm shares.

Extended Systems had the potential to open the door for consumer-pleasing Palm to enter the lucrative corporate market with its handheld-centered applications. Extended Systems management lamented the "slowing economy and market conditions" that led the companies to abandon their March agreement.

Investor relations director Karla Rosa emphasized that despite merger-related costs, Extended Systems managers "don't anticipate we're going to have a liquidity problem in operating our business for the next 12 months."

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