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The Rising Sun Over PALM 2007-02-13 11:10:49
Submitted by: admin
Takeover rumors have circulated around PALM throughout most of last year. After August of 2006, the rumors began to circulate with greater frequently. Leveraged buyout rumors on PALM are more recent, and were initially reported by StockRumors.com in early February 2007.
Palm Inc. (PALM $15.29)
Palm has long been known as a provider of mobile computing solutions. They currently manufacture Treo smartphones and other popular computing devices. They are an extremely well known company and have a solid reputation. When many people refer to their PDA, they will often just say “Palm”.
Many people have recently sold PALM shares as a result of new competition in the market - specifically the Apple iPhone. Many are afraid that the market for Treo smartphones will be significantly reduced as the iPhone is brought into the marketplace. The flurry of selling over the last quarter has created a perfect opportunity for private equity to dip in and purchase shares in large volume.
Takeover Rumors:
Palm has long been a rumored as a takeover target. Companies like Microsoft (MSFT) have typically been the rumored acquirer. If Microsoft wanted to, they could easily pay cash for such an acquisition. Rumors of a “ZunePhone” have recently been circulating, and it is certainly possible that they could just buy up a relatively small company like Palm and just market the already popular Treo.
While the takeover rumors and speculation that circle Palm are interesting and even fanciful, they seem much less likely than a leveraged buyout.
Why Palm Is a Good LBO Target:
Palm, Inc. currently has a market cap of just over $1.5B, with about $1B in current assets and total equity. The equity to market cap ratio is currently 0.63, or 63%. A tech company like Palm with such a high equity to market cap ratio would be an extremely attractive target for private equity.
In the year 2006, PALM had free cash flow of $83.58M. For private equity firms, this would mean that if nothing changed over the next year that they would be able to take $83M from their investment in PALM and apply it towards the debt that was created with the leveraged purchase. $83M is about 6% of the current market cap, which is high in comparison with many other tech companies that have only about 4% of their market cap in yearly free cash flow.
PALM shares have been mostly stagnant for much of the latter half of 2006, but have been at a low when compared to the first half of the year where PALM stayed between $16 and $24 per share.
The flurry of selling that was created by the announcement of the long-rumored iPhone created the perfect opportunity: negative volume.
Palm has many important factors going for it when we look at it from the perspective of private equity. High equity ratios, free cash flow and a low share price all make Palm extremely attractive.
Galleon Advisors, L.L.C. (etc.):
On February 2, 2007 Galleon filed a large stake in PALM. Galleon has been collecting the shares of PALM while many people were selling on fears of iPhone competition.
The SEC filing is available to read here: http://investor.palm.com/secfiling.cfm?filingID=1056829-07-14
Leveraged Buyouts in 2007:
Speculation has been circulating that this year will see even more private equity interest and leveraged buyouts than were seen in 2006, a record year.
Attractive targets frequently have had a difficult year or quarter and share prices will often be low. Private equity wants to pay as little premium as possible, so often the more beat-up stocks will frequently appear more interesting. The companies of interest need to also have a high equity and liquid asset to market cap ratios. In a leveraged buyout, the private equity firm will usually borrow on the assets held by the company. Liquid assets are especially important, as they allow access to the capital much more quickly.
High ratios limit the possible loss and create a safety net for any suitor considering the buyout of the company, as they would be able to sell all of the assets and recuperate a large portion of their investment if necessary. Additionally, because of this safety net, large banking firms are much more willing to loan to private equity groups so they can complete the leveraged buyout, and the assets of the company are used as collateral.
Free cash flow is also an important aspect when considering leveraged buyout targets. Free cash flow is basically what a company has left over after all of its capital expenditures (including what it takes to expand the business). It is the amount of money that the company could pay out to its shareholders without expanding and without letting its current operations drop off. The higher the free cash flow, the better.
Conclusion:
Private equity already seems to be taking a look and getting ready to pounce on PALM as a good LBO candidate. It appears that it is no longer a question of if PALM will be bought out as much as it is a question of when and for how much.
Note: This blog is intended to analyze only the rumors, and is not intended to analyze the stocks themselves. By using this site you agree that before making any financial decision you will consult both your attorney and your financial advisor.
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