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Palm Column

Sometimes even the smartest mergers never should have been

by Shawn Barnett
June 5, 2003

June 4, 2003, a day that shall live in incredulity. It was a day that saw Eric Benhamou preside over the reunification of Palm with its very founders. And while his words that the reunification would "form a new, stronger market leader in mobile computing and communications," will hopefully prove true words, Shakespeare would have been proud of the irony of this man, of all men, speaking them. 3Com, which under his leadership consumed Palm, US Robotics, and many other companies, as well as the famous Candlestick Park, has since spun off nearly every one of its acquisitions during that time, and 3Com itself is now smaller than ever. More important, it was Benhamou who refused to allow Palm's founders, Jeff Hawkins and Donna Dubinsky, to spin off the company in 1998, which inspired them to leave and form Handspring. And a year later, only three days before Handspring officially launched their first product, as both Hawkins and Dubinsky visited him on a courtesy basis to show him this new product--it was Benhamou who announced his bold new plan to spin off the Palm division.

That fateful week, Hawkins told the San Jose Mercury News, "If they had spun us out [a year ago], I'd still be there."

I quote Benhamou again from June 4, 2003, describing both the reunification of Palm and Handspring and the spinoff of PalmSource as a separate entity: "These two bold moves will serve as a powerful catalyst to transform the landscape of the handheld industry." How much bolder would Palm be today had their founders stayed in place? There's no way to know. But the very fact that Palm Inc. is such a small company, yet is also the worldwide handheld market leader, suggests that the split was less than helpful.

It is entirely possible that both teams have learned a lot and that the new arrangement will produce better and more useful product. One can certainly hope. But you can be sure it hasn't been fair to shareholders, employees, or customers to have to endure these constant shifts of management and direction that have been overseen by Mr. Benhamou since 1997. This merger will mark the sixth major business shift in a company that has only seen five major revisions to its software. And Benhamou will remain on both the PalmSource board and the Palm SG board.

Benhamou's contributions to the problem irritate me, but of course I realize I only know part of the story. I know circumstances can change, and perhaps it appeared to be the right choice to let the founders of a company you wanted to control leave to form their own competing company--though I can't see how. If he really wants to bring things back full circle, perhaps Benhamou should arrange to sell PalmSource and Palm SG back to the already spun-off US Robotics (one of the coolest names in the business, and Palm's original benefactor) and see what they'll be capable of from here. I'm being sarcastic, but 3Com never wanted Palm in the first place, it's a wonder they've held on for so long.

But Benhamou isn't the real story, just the underlying cause. Many facets of the merger are of interest, and I have a few concerns. In October 1999, I thought a merger sounded like a good idea. But a lot has changed. My main concern is the potential for the merger to upset all that's going right with Palm. Palm SG under Todd Bradley has reached its stride, and Palm Inc has been preparing for the PalmSource spinoff for some time. They seem to be doing well. Bringing people onboard who have been in charge of their own ship for a few years could present some conflict and create confusion among the crew. Handspring was a small company that was innovative, but conservative at the same time. Palm has changed more than a little, pursuing its own vision with a product roadmap that stretches out for years.


This brings up the question of whether it was just good decision-making that led Handspring to pursue a course that really didn't compete with market leader Palm, or if this merger has been planned for years. Palm seemed pretty competitive with Handspring in 2000 and 2001, frequently announcing competing product plans just days before Handspring announced--and usually shipped--actual product. But it was 2002 that saw the announcement that the Visor would soon be no more, and this year that saw the quiet death of Handspring's last non-communicator, the Treo 90. Did Palm's distant roadmap come to include the Treo line somewhere in 2002? There certainly haven't been many announcements from Handspring in the past year, another anomaly. Palm's Tungsten W was also a half-hearted threat at best, with its stated purpose being primarily data and "occasional phone calls."

Or was it the rumors of RIM and Handspring's pending merger that inspired this transaction? The handheld that Hawkins is holding in the photo that accompanies the merger announcement, presumably the rumored Treo 600, does have the opposing slanted keys that he told me years ago was part of a RIM patent, a discovery that had forced them to slant the keys all to the right on the original Treos. Certainly there was some sort of relationship, one that may have either been interrupted by, or else helped facilitate the recently announced decision for Palm SG to use RIM's Blackberry email server software in future corporate products.

Whether it was planned or just the result of Handspring suffering in a very competitive and difficult economy, the two companies do fit reasonably well. Palm has the pure organizers and the wireless data devices, and Handspring has some slick communicators. Palm SG has incredible market share and the conservative business base (finally) to maintain profitability, and their retail channel is strong and well established. Handspring unfortunately burned many of its bridges to retail when it killed the Visor, but it has built good relationships with cell phone carriers over the past two years, acumen it should be able to apply with even greater effect given Palm's stronger standing in the market.

The two companies will also remain mostly intact. Palm SG's Ken Wirt will stay in charge of Palm's Tungsten and Zire programs, and Ed Colligan, Handspring's President, will be in charge of the Smart Phone division. About 125 people will be laid off, or as they said in the press conference, there will be "head count reductions."

Jeff Hawkins, currently Chief Product Officer of Handspring, will become the Chief Technology Officer of the combined company. Though I believe Hawkins to be a unique individual who handles things his own way, it is often amazing how events in the handheld computing industry are mimicking the PC industry, and this remarriage after an unsuccessful divorce has been seen before. Upon returning to Apple after leaving at the hand of John Sculley and starting NeXT Computer, Steve Jobs brought back his OS and a few technologies, and set about reversing a few key changes Sculley had made that rubbed him the wrong way. He killed the Newton, first of all, Sculley's baby (something for which there is no corollary at Palm SG, thankfully). He also killed the licensing scheme that was then in place, preferring Apple to be the only source for both the OS and hardware. Might this returning founder be tempted to do some of the same?

Palm may have sought to comfort investors and licensees who might have made this connection by also reiterating at the same press conference their commitment to the spinoff of PalmSource as a sole entity. There are enough cool and even complimentary products out there that I hope PalmSource will continue on the path to independence, one of which I'm using to write this story. But a big part of what makes a Palm OS device great is its software, and all licensees will be continuing to diverge the capabilities of the software to strengthen their market position. Wouldn't Hawkins be wise to want some control of PalmSource as well?

All of the licensees need a strong and consistent PalmSource; but whoever controls PalmSource controls the future of the platform. It might be prudent for Hawkins to at least seek a presence on the PalmSource board to help guide development of the OS he created. Benhamou may serve a good purpose here, since he sits on both boards. Hawkins might be better positioned in his place or else alongside.

But as I say, Hawkins is a very different man from Jobs. While he's still interested in seeing his child grow into the communicator he envisions, he's less likely to try to take the company over and make it his again. It doesn't appear that the current established structure of Palm would even allow for that. No pun intended, but in the end it is a shame that the man who founded Palm and created the industry's most successful handheld won't be able to pilot it into profitability.

More to come?

I'm still wondering when the other shoe will drop over PalmSource. I have long expected a big company like Matsushita to come in and buy either Palm SG or PalmSource right out from under Sony. Matsushita is the manufacturer of the Panasonic PalmCam digital camera, and unlike everyone else they haven't been sued for using the name Palm. The camera uses the SD card in which Matsushita is a major player, and as yet this giant electronics manufacturer has only released one rugged handheld based on Windows CE. The purchase of Palm SG would give them an instant dominance in a market they've heretofore ignored, unusual behavior for one of Sony's major rivals. I'm assured by my Editor in Chief that Matsushita is more interested in industrial computing, as is evidenced by their Panasonic Toughbook line being the only notebooks they sell. Sony already owns part of PalmSource, and it is my understanding that PalmSource isn't exactly swimming in money from licensing fees.

So though I think it's time for all Palm OS players to settle down and concentrate on product strategies for the next four years, I'm forced to wonder if this isn't only the beginning of mergers and acquisitions in the handheld space.

This Fall both the split of PalmSource and the Palm SG/Handspring merger will take place simultaneously, and the latter will be marked with a new name for the merged company. I'm hoping they stick with Palm, the name that brung 'em. But they could move their campus to the Southern California desert to a city with the tailor-made compromise name: Palm Springs. I shudder to think what the four letter stock name would be. (If you have any proposals for names, please send me an email by clicking on my signature at the end of this story.)

Management upheavals, mergers, splits, spinoffs, and name changes have kept the industry's strongest player from realizing true success for far too long. The team is now back together. May their efforts from here be focused on creating products that meet customer needs with grace and style, with management only there to facilitate the creation, promotion, and distribution of excellent and useful product. I know that's supposed to be the point. But a few critical management blunders have up to now pitted great creative minds against each other. It has improved product, but killed profits with price wars and redundancy.

-Shawn Barnett,

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