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] come as little surprise to those of us who have been following the company. When we got word Friday that there would an unspecified number of layoffs coming at the company, it barely garnered a second look, especially when systemic issues facing so many sectors in tech have already caused at least 11,000 layoffs by Silicon Valley stalwarts over just the past few weeks alone.So when a company like Palm, whose issues are largely its own, decides to cut back and reorganize, it's hardly headline-grabbing.
But what could be worth an investor's second glance is a note out this morning from Pablo Perez-Fernandez, the wireless analyst at Global Crown Capital. Not only is he downgrading shares this morning to a "Sell," he suggests that Palm's single biggest investor, the venture capital firm Elevation Partners, may be looking to unload its stake in Palm. If that were to happen, it could be the beginning of the end of this company.
In his note this morning, Perez-Fernandez chides the company's strategy to pay a one-time, $900 million dividend to engineer Elevation's 25 percent stake for $325 million made no sense then, and is even more difficult to swallow today, given the company's current financial straits. He asks, "We would like to know whose idea it was to take on $400 million in debt to pay out a $900 million, one-time dividend so that Elevation's $325 million investment would equal roughly 25 percent of Palm?" He adds that the company today has a negative $140 million in net cash, and could burn at least $80 million to $100 million over the next four quarters. And that grim outlook at a time when he says it's next to impossible to raise new capital.
Perez-Fernandez throws it out there that Elevation might divest, but he offers nothing concrete to support the claim. It's reasonable, he tells me, given the circumstances, though he also tells me hasn't gotten any specific information from Elevation on this front. He says Palm's decision to launch a shelf registration on Nov. 3 because the company is so desperate for cash, will significantly dilute the shares, and the company risks a change in control because of that dilution. Under the rules of the Elevation deal, Palm is required to offer to buy back Elevation's stake at a premium of 1 percent to 5 percent. Elevation, he thinks, would jump at the chance to get out. I sent an email to Elevation's managing partner Roger McNamee this morning seeking some guidance, but I haven't heard back.
Perez-Fernandez's report follows my examination of the company's "curious" decision in August to release a $549 Treo Pro with no US carrier support. CEO Ed Colligan sat down with me around that time to make the claim that the stunningly high price would be easily absorbed by IT managers more interested in using the phone on the carrier of its choice, rather than being tied to the carrier of Palm's choice. Flexibility comes at a cost, he reasoned, but it would be a cost corporate customers would eagerly pay. I posited then that the assumption sounded more like strategic window-dressing; that it was more likely that Palm simply had difficulty getting manufacturing costs low enough that a carrier could cost-effectively subsidize it. That would be devastating. And it seems to be the case.
And while Palm's flagship phone continues to languish, we're seeing Apple's [AAPL
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] 3G iPhone continue to fly off store shelves; we see the new Bold and Storm from Research in Motion [RIMM
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] continuing to enjoy the spotlight. All of them are at price-points at $299 or below.
Palm seems to be at serious risk of becoming a smart-phone also-ran, an asterisk to an otherwise dynamic sector that continues to push innovation and capability. In my several interviews with Colligan over this past year, he has always made the compelling argument that the smartphone market is just beginning and that there is clearly enough growth to support multiple success stories. I'd agree. But those success stories seem to be building around RIM and Apple and Nokia,[NOK
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] while Palm continues to grasp for growth just outside its reach.
Perez-Fernandez takes Colligan to task, reminding investors he has had "very little success" turning companies around, and while the company still has trouble getting its newest mobile operating system out the door (two years late and counting), it's being passed by Apple's mobile OS X, Android S60 from Google[GOOG
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], even Microsoft's[MSFT
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] Mobile Windows. Global Crown suggests this holiday season will mark the beginning of the end for Palm. With a stock around $2, down from over $8 in October, it would seem investors are not so reluctantly agreeing.
Questions? Comments?
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