Palm, Handspring Surge on Merger Speculation By REUTERS Filed at 6:33 p.m. ET NEW YORK (Reuters) – Shares in both Palm Inc. (news/quote) (PALM.O) and Handspring Inc. (news/quote) (HAND.O) surged on Monday in the latest round of speculation about at least a dozen takeover scenarios in which either or both rival handheld device makers might be bought. Handspring shares jumped $1.41, or 35 percent, to $5.41, making it a top percentage gainer in heavy trade on the Nasdaq. Palm rose 44 cents, or about 12 percent, to $3.87 on Nasdaq, where it was the second most active issue. In its “Heard on the Street” column, the Wall Street Journal reported on investor hopes that Palm and Handspring could merge — the latest permutation in a long string of merger speculation involving the companies. The speculation, which was denied by Handspring, focused on the recent departure of Palm Chief Executive Carl Yankowski. “Carl Yankowski stepping down as the CEO of Palm has pulled up all the questions about the long-term future of the company,” said Lehman Brothers (news/quote) analyst Dan Niles. “If you bought Handspring maybe you could put one of those guys in as the CEO.” Handspring founders Donna Dubinsky and Jeff Hawkins left Palm to start the rival company. Palm and Handspring have been fighting for the same customers ever since, locked in a price war. “It’s worthwhile to eliminate a competitor and eliminate competitive pricing in the marketplace,” said Rob Buxton, managing director with CIBC World Markets. A Handspring spokesman denied there was any Palm-Handspring deal in the works. “No, we are not in discussions with Palm at this time,” he said. Palm was not immediately available for comment. TAXES A BIG FACTOR Sources familiar with the matter have said that Palm was considered a target by PC makers such as Dell Computer Corp. (news/quote) (DELL.O) and Gateway Inc. (news/quote) (GTW.N) about a year ago. “There was a lack of fit with the Dell distribution strategy at that point in time,” said one source. “And Gateway has other ongoing operational issues.” Earlier this year Yankowski threw cold water on rumors that International Business Machines Corp. (news/quote) (IBM.N) was making moves to buy Palm, saying Palm had not been approached by the world’s largest computer maker. However, Palm becomes more interesting next year as a takeover target, as it nears a milestone of two years after its spinoff from 3Com Corp. (news/quote) (COMS.O), analysts said. Until then, there are serious tax consequences to buying more than a 50 percent stake in Palm. Industry sources confirmed that buying Palm before July 27, 2002 would mean a tax hit, on top of the purchase price, in the ballpark of $500 million. Both Palm and Handspring’s stocks have fallen more than 90 percent in the past year, making both companies more attractive as takeover targets, analysts said. “With Palm it is complicated because of the tax implications,” said Pacific Crest Securities analyst James Faucette. “The longer the stock languishes and the closer we get to the date when those tax restrictions expire, the louder these rumors are going to be.” Analysts said either company could be attractive, even to cell phone makers such as Finland’s Nokia (news/quote) (NOK1V.HE), or even Microsoft Corp. (news/quote) (MSFT.O), the software maker that offers a rival Pocket PC operating system. Analysts pointed out, however, that Nokia has a stake in Symbian, which offers a rival operating system to the Palm OS, which is backed by four of the five top cell phone makers. “Nokia has been really pumping Symbian,” said J.J.B. Hilliard, W.L. Lyons analyst Thomas Carpenter.