Palm: Is the M&A Arbitrage Premature?

Shares of smartphone company Palm have been trading as if a tech sector acquisition is imminent, but does it all just amount to a bunch of tech-stock rumors at this point?
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SUNNYVALE, Calif. (

TheStreet

) -- Is a big tech company about to have embattled

Palm

(PALM)

in the palm of its hand?

Speculative M&A trading in Palm shares, which began last week, suggests that's the case, and the press has been busy putting rumors in the palm of traders' hands to help drive the frenzied tech sector action.

A Dealmaker's Five Predictions: Forbes

Shares of Palm, which had been given up for dead, were trading as if a White Knight was on the horizon on Monday, after

Bloomberg

reported that high-profile tech sector bankers were at work on finding a buyer for Palm. Palm is reportedly working with

Goldman Sachs

and tech dealmaker Frank Quattrone to find a buyer, and to make the struggling Smartphone maker as attractive as possible to potential acquirers.

Last week, the

New York Times

also reported rumors of potential Palm suitors. Palm shares rose from their nadir under $4 on Tuesday to just above $5 on Friday afternoon. The year-to-date drop in Palm shares before last week's speculative trading began was equal to 60% of Palm's stock value.

On Monday, Palm shares had gained close to another $1, or 17%, to just above $6. There were more than 149 million shares of Palm traded on Monday, versus an average daily volume of 31 million shares traded.

Last Wednesday and Friday were days of close to 90 million Palm shares being traded.

The problem for Palm, of course, is that not enough of that trading is being done via its own line of smartphones.

What's more, Palm has given quite a back-handed slap to its investors, who had become accustomed to thinking that the smartphone maker's share value was in their back pocket, so to speak.

Palm shares crashed early this year on reports that its sales had fallen off by 50%. In late March, Palm shares had dropped under the $4 mark, after having traded as high as $18 earlier this year.

Companies rumored to be on the short list of buyers included Taiwan's

HTC

and China's

Lenovo Group

.

Nokia

(NOK) - Get Report

and China's ZTE Corp. were also rumored to be among potential bidders for Palm.

While Palm's brand remains strong, its market share was weak at the end of 2009. Palm ranked sixth among smartphone makers with a 4.3%, according to consulting firm Gartner, and well behind

Research in Motion's

(RIMM)

44% market share, and

Apple's

(AAPL) - Get Report

25% market share.

Palm has been burning through cash at a rate that questions its viability, so it's no surprise that a potential sale is now being considered.

Palm's CFO last month forecast sales for the quarter ended May that would be 50% lower than analyst estimates. This tidbit of data may be welcome news to Palm's potential suitors, banking on a tech turnaround story and hoping to pay relatively little for the risks involved.

Given the

recent and successive problems at Palm, any potential acquirer of Palm would likely try to enter into the bidding with a lowball offer.

Palm is reportedly holding out for a bid of at least $1 billion -- a bargaining point which, it is said, may be important to its largest private investor, Elevation Partners. But if the price Palm commands as an acquisition were to reflect the price that its smartphones now command in the retail market, the $1.1 billion value would be wishful thinking on the part of Palm's backers.

Palm smartphones have been in the bargain bin at Verizon stores. Verizon has been selling Palm's Pre Plus at a 75% discount.

The value of Palm may not be the issue, bur rather, the amount of investment that will be required beyond the purchase price to revive Palm's fortunes.

Dell

(DELL) - Get Report

reportedly already walked away from the negotiating table, though not necessarily due to the expected Palm price tag.

Are investors who have been trading on the M&A arbitrage making the smart trade on the smartphone market? The

Wall Street Journal

noted on Monday that one of Qauttrone's existing tech sector clients,

Brocade Communications

(BRCD)

, hasn't been able to find a buyer since Quattrone began shopping Brocade in October.

And so we ask you: Will a tech sector suitor answer Palm's call of distress at a price to merit all the recent trading in Palm shares? Or will these bets prove premature, with Palm left to answer its own Palm Pre Plus SOS? Take our poll below to learn the what

TheStreet

thinks.

-Reported by Eric Rosenbaum in New York.

RELATED STORIES:

>>Palm Investors Brace for Takeunder

>>Verizon Snubs Palm Pre

>>Google iPhone Could Threaten RIM

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