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Motorola's Woes Hit Stock, Make Palm Deal Less Likely

Jim Goldman
Jim Goldman

Motorola's financial woes hit the stock hard and may delay, or even throw a wrench into the company's desire to acquire smartphone maker Palm, sources at both companies told CNBC.

After the market closed on Wednesday, Motorola sharply scaled back its first-quarter earnings estimate, named a new president and chief operating officer, and announced the retirement of its current chief financial officer.

Motorola said it will report a first-quarter loss due to declining sales and profit, and expects to miss its full-year forecasts for sales, profitability and cash flow, as its turnaround is taking longer than the company initially predicted.

Oppenheimer analyst Lawrence Harris said Motorola may still be interested in Palm, but that a deal is less likely in the near future.

"Previously, investor expectations had been that a transaction would be announced sometime today," he told the AP. Harris expects Sunnyvale, Calif.-based Palm to post above-consensus earnings and revenue when it reports its fiscal third quarter earnings after the markets close on Thursday.

Motorola shares fell sharply in after-hours trading and are down further this morning.

During a conference call with Wall Street analysts Wednesday evening, only one analyst asked Motorola CEO Ed Zander indirectly about the speculation of a Palm acquisition or even a leveraged buy-out involving Motorola itself. He brushed the questions off.

Meantime, a source inside Motorola compared the potential of a Palm acquisition to home-buyers searching for houses outside their price-range.

A photo provided by Motorola Inc., shows the new black version of its popular Razr V3 cellular phone. On Tuesday, July 19, 2005, the Schaumburg, Ill.-based Motorola bettered Wall Street's expectations by reporting second-quarter profits of $933 million, reflecting continuing strong sales of its Razr and other new products. (AP Photo/Motorola Inc.)

"You're looking at pricey houses," he said. "You fall in love with one, you want it, but you really can't afford it."

A major shareholder in Palm told CNBC late Tuesday night a deal was imminent, with Motorola putting a $2 billion purchase price on Palm, or roughly $20 a share, and that the acquisition would be announced as early as Thursday morning.

Instead, Motorola's announcement of an earnings shortfall caught many analysts off guard.  Cowen's Matthew Hoffman called it "jaw-dropping," while G-Square Asset Management's Pablo Perez-Fernandez described Motorola's announcement a "financial trainwreck."

Still, G-Square's Perez-Fernandez said a deal for Palm makes more sense for Motorola now than ever.