Palm chief executive mulls company split

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By Richard Waters in New York and Andrew Heavens in San Francisco

Published: June 12 2001 17:56GMT

Palm is considering a break-up into two companies to separate its software licensing operations from the manufacturing and distribution of its handheld devices, the company’s chief executive said on Tuesday.

Such a move could help to ease Wall Street concerns about the company following the disastrous launch of its latest models.

Palm warned last month that delayed shipments of two new personal digital assistant lines would leave it with revenues of only around half of its previous estimate, while it will also have to write off $300m of inventory.

Carl Yankowski, chief executive, said that he had been studying the best way to split Palm in two for the past year.

“We’ll have another review at our next board meeting of the various possibilities,” he told investors at the Bear Stearns technology conference in New York.

A split into separate software licensing and hardware companies would echo a similar move by Qualcomm, which holds the patent on CDMA wireless technology. Qualcomm sold its handset manufacturing business last year.

The move would help Palm capitalise on its dominant position in the handheld software market, without the distraction of its recent hardware blunders.

The Silicon Valley company currently only gets a slither of its sales from licensing its operating system to Handspring, Sony and other device makers.

But analysts said its software operations would become an increasingly important source of earnings as handheld computers became more of a commodity. Palm has already been concentrating on building up its software arm. In the past it has said the unit could eventually account for about 40 per cent of sales.

A division would also resolve a conflict of interests in the company, which licenses software to its own competitors in the hardware field. Analysts said a separated hardware division would have also more time to iron out operational glitches that have hampered recent launches.

“A split would get hardware guys in line because they have really botched on the operational side,” said Todd Bernier of Morningstar. “To me the plan smacks of desperation. But these are desperate times for Palm.”

Sales of Palm’s handhelds hit a wall in March – a dramatic reversal from the double-digit revenue growth that it enjoyed following its spin off from 3Com just last year. The company blamed the US economic slowdown.

But it also faced criticism for a string of management mis-cues, including the delayed launch of its flagship M500 and M505 lines and the cancellation of its planned acquisition of Extended Systems, a maker of wireless corporate software for PDAs.

Earlier this year it cut 300 jobs and warned it was considering further reductions to its workforce. The plummeting value Palm’s share price sparked speculation that it could become an acquisition target.

But Mr Yankowski tried to quell the rumours, telling conference attendees that he had not been approached by any interested acquirers. He added that the company was on track to return to profitability after it had cleared its inventory build-up and was in no danger of running out of cash.



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