SAN JOSE, Calif. — In hopes of surviving in an ever-more-crowded industry, handheld computer maker Handspring Inc. plans to merge with Palm Inc. — the very company that Handspring's founders launched a decade ago but broke away from amid management conflicts.
"It's like the reunion of twins separated at birth," said Steve Baker, technology researcher at NPD Intelect.
Palm, the leading maker of personal digital assistants, said Wednesday it plans to acquire Handspring in the fall after it completes its spinoff of PalmSource, the unit that makes the Palm operating system for handheld computers. The merged company will be renamed, the companies said.
The deal could give Palm a desperately needed foothold in the market for handhelds with phone and wireless data functions, and jolt Handspring with an infusion of cash and marketing power.
Under the proposed terms, Handspring's shareholders would receive 0.09 Palm shares — and no shares of PalmSource — for each share of Handspring common stock. Palm would issue approximately 13.9 million shares of common stock to Handspring's shareholders on a fully diluted basis.
As a result, Handspring's shareholders would own 32.2 percent of the new company, and Palm's would own 67.8 percent.
The value of the stock swap would be $169 million, based on Tuesday's closing prices. But the final value will be based on Palm's share price following the PalmSource spinoff.
The merger, which is expected to lead to 125 layoffs, was approved unanimously by the two companies' boards. It still requires shareholder and regulatory approval.
Palm shares rose $2.29, almost 19 percent, to close at $14.44 Wednesday on the Nasdaq Stock Market. Handspring shares gained 17 cents, or 15 percent, to $1.28.
Mountain View-based Handspring has been struggling with the tech downturn, fighting huge losses and trying to transition to a new product line — what it calls communicators, a combined personal digital assistant and cell phone. It was long the No. 2 maker of handheld computers, trailing only Palm but has seen its market share decline dramatically since it decided a year ago to concentrate instead on its Treo communicator products.
Handspring was about to run out of cash this year and was close to securing new funding when the merger proposal surfaced, said Donna Dubinsky, Handspring's chief executive.
The merger option "offered a better strategic benefit for us," she said in an interview.
Palm executives said the acquisition and PalmSource spinoff will strengthen the Milpitas-based company, which has had big losses of its own and now faces increasing competition from Microsoft Corp. and other handheld device makers.
"Palm just extended a lifeline to Handspring, and Palm now gets a stronger product line," said Alex Slawsby, an analyst with International Data Corp.
Palm was founded in 1992 by Dubinsky and Jeff Hawkins and created the defining brand in handheld computers, the Palm Pilot. Palm was acquired in 1995 by modem maker U.S. Robotics, which in turn was gobbled up by 3Com Corp. in 1997. At that time, Hawkins and Dubinsky wanted Palm to be spun off. 3Com refused but ultimately did so in 2000.
Hawkins and Dubinsky left Palm in 1998 because they wanted to lead a startup again.
Any bitter feelings have been apparently buried, especially since Palm overhauled its management team in the past year in anticipation of splitting the hardware and software divisions.
"For us, this is more about the future than about the past," Dubinsky said.
"Lots has changed at Palm," Hawkins told analysts in a conference call. "This is not a reunion for me, and there is no nostalgia."
Hawkins, Dubinsky and Handspring co-founder Ed Colligan experienced a few high-flying years of growth. But like Palm, Handspring lost ground to rivals that use Microsoft's rival Pocket PC operating system.
Last year, Handspring discontinued its Visor handhelds and bet instead on its new Treo communicator. While analysts have hailed the Treo as the best in the so-called smartphone category, that fledgling sector has yet to take off.
But many believe it will — as more cell phones add messaging and data features and as more personal digital assistants get the capability to transmit and receive information wirelessly.
Already, Handspring's Treo is up against stiff competition. Of the 1.7 million smartphones shipped worldwide in the first quarter, Nokia led with 57 percent of the market share, followed by Sony Ericsson, Motorola and Samsung, according to IDC. Handspring ranked fifth with 4 percent.