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Motorola Looks Like Palm's Main Squeeze

A buyout of the gadget maker could mean better margins for Motorola and a revival for Palm.

If the frenzied speculation around a



buyout is to be believed, the deal is in the final stretch, and the company will make an announcement by the end of the week.

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Palm seems to have four suitors:





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and private-equity firms Silver Lake Partners and Texas Pacific Group.

But there are signs that Motorola

will emerge as the winner in the bidding process.

A buyout of Palm could happen at more than $20 a share. "Someone paying $1.5 billion to $2 billion is paying just one times revenue, so my guess is a deal will be at around $22 to $25 a share," says Phil Butts, a portfolio manager with Moreton Bay Capital, which has owned shares of Palm in the past but currently does not have a position in the stock.

Palm spokeswoman Marlene Somsak declined to comment on the buyout chatter.

Shares of Palm have soared more than 16% since the beginning of the month, when buzz about a possible sale intensified.

The stock was up 60 cents, or 3.2%, to $19.37 late Wednesday.

A Little Back Story

A buyout, when it happens, will be a surprising end to a company that has fought hard for the right to stay independent and chart its own destiny. Palm started as Palm Computing in 1992 with Jeff Hawkins and Donna Dubinsky, who still sits on the company's board of directors. In 1997, the company became a subsidiary of



. Unhappy with the company's direction under 3Com, Palm's founders and current CEO Ed Colligan left to form Handspring, which made PDAs using the Palm OS.

In 2000, 3Com let its Palm subsidiary become a publicly traded company. Three years later, Palm and Handspring merged and completed the circle.

"Knowing how long the founders fought to get the company back, it is difficult picturing them selling out now," says a former Palm executive who believes the company would prefer to a private-equity buyout.

But the Sunnyvale, Calif.-based Palm may have little choice. One look at its flagship product, the smartphone Treo, and most users can tell what's wrong with the erstwhile PDA-market frontrunner.

Treo, despite its attempts to meld form and functionality, is out of tune with the trends in the mobile handset business. As the rest of the smartphone industry has moved toward slim and sleek phones, the Treo still retains its bulky, brick-like shape and stubby antenna in many models.

Who's Needier?

Palm is also facing pricing pressure and stiff competition from BlackBerry maker

Research In Motion


, which has captured a significant share of business users. "A buyout has to happen for the future of the company, the Palm brand and the platform," says Carmi Levy, an analyst with Info-Tech Research.

That's where Motorola could fit in. Motorola needs Palm as much as Palm needs it, says Levy.

Motorola has had trouble maintaining margins and

momentum after releasing its Razr phone. Palm, with its Treo product line, could mean more leverage for Motorola's in the high-end smartphone market, where margins are much better.

Palm's OS plan also plays to Motorola's strengths. Unlike rival Nokia, which has bet heavily on the Symbian operating system, Motorola has its fingers in multiple OS pies, including Linux and Windows Mobile.

Palm over the last few years has been cozying up to


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and has offered models of the Treo running Windows Mobile.

What Motorola does do better than Palm is offer sleek hardware, something Palm could benefit from. That's why combining Motorola's expertise when it comes to slick handsets with Palm's strength in OS design could help create a killer product, says the former Palm executive.

Motorola has tried to break into the smartphone market with Q, but reviews of the Q, including one by the

Wall Street Journal's

gadget expert, Walt Mossberg, have pointed out that the Q's implementation of Windows Mobile OS is "much clumsier" than that of the Treo.

Q's hardware combined with Treo's software could make a compelling combination, says Info-Tech Research's Levy.

Motorola has already tried to assemble the pieces for a comprehensive smartphone business plan. In November, the company

bought wireless email player Good Technology in a bid to level the playing field that is so far dominated by RIM.

Good Technology has worked well with Palm devices, and a buyout of Palm by Motorola could make that a facile integration.

Palm's third-quarter earnings report due out Thursday is likely to offer something concrete about the impending buyout.