A long saga in the handheld computing industry came full circle Wednesday as Palm Inc. said it would acquire Handspring, a rival created by Palm’s own founders.

Palm said the transaction would see Handspring, best known for its

Visor and Treo line of products, become part of the Palm

Solutions Group, the business responsible for designing, making and marketing its hardware. Last year Palm announced its plan to spin off the OS side of its business as a separate entity, called Palmsource. Palm said Handspring’s shareholders will receive 0.09 Palm shares – and no shares of PalmSource – for each share of Handspring common stock owned.

Handspring was founded in 1998 by Jeff Hawkins and Donna Dubinsky, who also founded in Palm in 1992. At a Comdex Canada keynote last summer, Dubinsky said she and Hawkins had left Palm after three years of trying to convince 3Com,which owned Palm after acquiring U.S. Robotics in 1997, to spin the handheld maker off as its own company.

In Canada, Palm commands the No. 1 position in the handheld market according to Toronto-based Evans Research Corp. Sony follows close behind, having seen shipments rise 62 per cent in the first quarter of this year over the same period in 2002.

Evans analyst Albert Daoust said Palm was likley attracted by

Handspring’s Treo product, which combines elements of a handheld and a mobile phone, or a smartphone.

“”Palm’s thinking is that in 2005 this IP telephony market is going to go over well. There may be some intellectual property they want there,”” he said. “”They might want a product, and the Treo is a reasonably good product.””

In the last two years, Palm has faced increasing competition in the handheld market following Microsoft’s decision to develop a PocketPC operating system for personal digital assistants. consumer electronics specialists Toshiba and Casio came out with devices last year. Compaq, successful iPaq product, meanwhile, survived its merger with HP last year,.

Palm responded by reorganizing its product line in 2002 into a high-end enterprise segment, served by its Tungsten devices, and the consumer segment, served by the Zire handhelds.

Darren Humphries, a business development manager for Florida-based Palm developer DDH Software Inc. who works in Toronto, said the Treo might not be worth Palm’s while.

“”The only thing Palm gets out of it is (Handspring co-founder) Jeff Hawkins, but how much do they even need him for new product development?”” he said. “”The Treo is a good product and everything, but

it hasn’t sold like gangbusters, whereas the Zire has been selling millions and millions.””

Palm’s Canadian operation is run by Michael Moskowitz, while Handspring’s Canadian sales strategy was led by former Epson executive Jim Mandala. Synnex was Handspring’s key Canadian distributor.

Palm’s acquisition of Handspring is being described as bold move that will help grow the Palm Economy.

The terms of the deal are this:

  • Handspring’s shareholders will receive 0.09 Palm shares – and no shares of PalmSource – for each share of Handspring common stock owned.
  • Palm will issue approximately 13.9 million shares of Palm common stock to Handspring’s shareholders on a fully diluted basis.
  • Handspring’s shareholders will own approximately 32.2 per cent of the newly merged company on a fully diluted basis.
  • Palm’s shareholders will own approximately 67.8 per cent.

The value per share to be received by Handspring shareholders will be based on the Palm share price following the spin-off of PalmSource. The spin-off of PalmSource will be completed immediately prior to the closing of the Handspring acquisition.

The two entities may have a new name after the dust settles this fall, subject to certain conditions.

Palm consists of two businesses – PalmSource, a subsidiary responsible for developing and licensing the Palm OS, and the Palm Solutions Group, a business unit responsible for designing, making and marketing the devices.

According to Palm, the deal will improved operating efficiencies of approximately $25 million in cost savings annually. The cost savings assume combined employee reductions of approximately 125 people, elimination of overlapping programs and unnecessary real estate, and the advantages of increased volume in manufacturing and distribution. Handspring employees are expected to move to Palm Solutions headquarters in Milpitas, Calif.

Handspring planting roots in Canada in mid-2001. With just two customers, Handspring managed to gain 15 per cent market share in the country, according to Toronto-based Evans Research Corp.

Handspring hired former Epson Canada general manager, Jim Mandala, as its first Canadian employee.

Mandala first move was to sign Hartco out of Montreal to expand its retail coverage through its storefronts Compu-Smart and CompuCentre. He later inked deals with Future Shop Ltd., The Business Depot Ltd. and Synnex Canada to become its main distributor.</

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