Speculation Running High. Will Motorola to Buy Palm?

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The shareholder, who spoke with me exclusively anonymously, confirmed that Morgan Stanley had been enlisted by Palm to shop the company around beginning in January, and that talks "intensified" two weeks ago when Motorola entered the discussions. Prior to that, negotiations had been underway with


, and two private equity firms, Silver Lake Partners and Texas Pacific Group.

"It's clear this company has to be sold. It can't go this far without saying anything. It's basically damaged at this point and needs to be acquired," this shareholder tells me.

But this shareholder says talks have now boiled down to Motorola, and that a deal is the right move for both companies.

"For Motorola, I think it's the threat of Nokia owning Palm. The upside for Motorola is much greater. If they own Palm, they're really the most substantial player running the Windows (Mobile) operating system. Motorola could become a key Microsoft partner," this shareholder tells me in an exclusive interview.

As far as the purchase price is concerned, his sources tell him that private equity buyers assured the company of a $17 or $18 floor, but that this shareholder could see the price blossoming to as much as $25 a share, calling the higher amount a "deal."

"(Palm generates) a lot of cash. Paying $2 billion in cash for a company generating $120 million in free cash flow is not a stretch. They could pay up to $25 a share and the deal would still be accretive. Accretive immediately," this shareholder says.

This shareholder says while Palm has had difficulty in the marketplace, investors and analysts shouldn't underestimate the importance of the company as a strategic asset for a larger player in handhelds, particularly Motorola. That's because the industry is quickly coming down to just three major software vendors: Research in Motion and its Blackberry operating system; Microsoft and its Windows Mobile operating system; and the upcoming iPhone from Apple its Mobile Mac operating system. If Motorola were to acquire Palm, this shareholder says, it would launch Motorola to an elevated status with Microsoft.

"Apple is about to walk away with the OS market for handheld computers. Microsoft has been successful because it's always owned the OS. In some ways, the iPhone is a Trojan horse, a handheld computer running the Mac OS that's poised to take over the world."

This shareholder was quick to point out that handicapping mergers and acquisitions is hardly a perfect science, and that anything can still happen until the papers are signed. This shareholder also said to pay careful attention to those papers, and the deal when it's announced.

"Keep an eye on the 'break-up fee,'" this shareholder says. "If there's pressure to get a deal out there, and there's a small break-up fee, it's a clear sign this auction isn't over."

As for Motorola, this shareholder says he and his shares would be pleased if a deal with that company gets done. A cash transaction, is preferred, but this shareholder says if it's a stock deal, then, "It's a matter of 'I'd care very much who the buyer is. I'd love to see Motorola buy it. They probably have the most undervalued stock of the players here and the greatest potential."

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