Deal for Handspring Would Bring Palm’s Founders Back Into the Fold

The duo who turned the Palm Pilot into the de rigueur accessory of the tech boom agreed Wednesday to sell their struggling Handspring Inc. to Palm Inc. for about $200 million in stock.

The sale would reunite Donna Dubinsky and Jeff Hawkins with Palm -- the company they founded in 1992 -- in a deal representing the transformation of Silicon Valley from giddy purveyor of gadgets to sober-minded realist.

Handspring was worth more than $14 billion at its peak, but the company’s market value shriveled along with demand for hand-held organizers.

Particularly hard hit was Handspring’s signature Visor line of devices that were designed to marry organizers with cell phones, cameras and music players.

Nonetheless, Hawkins said Wednesday that he believes the future of mobile computing lies in packing more functions into ever-smaller packages.

“Phones and hand-helds will be our most essential computing and communications tools,” said Hawkins, who designed the original Palm Pilot prototype in 1994.

In somewhat bittersweet terms, he spoke of returning to the company he helped found, mostly for reasons of survival.

“Palm has changed a lot since I was there,” he said. “Most of the people are new. So this is not a reunion for me, and there is no nostalgia.”

However, he added, “I believe that by joining with Palm, we will be able to deliver a much broader portfolio of products that will shape the future of the industry.”

Consumers so far aren’t convinced that personal digital assistants belong in their futures. The worldwide PDA market reached a plateau in 2001, with 13.3 million units sold, according to market research firm Gartner Inc. Since then, demand has slipped, to an estimated 12 million units this year. Sales dropped from $3.9 billion to an estimated $3.5 billion in the same period.

At the same time, Palm’s operating system is under assault from Microsoft Corp.’s rival Pocket PC platform, which is based on a stripped-down version of Windows.

Based in Milpitas, Calif., Palm lost $82 million in its 2002 fiscal year; Mountain View, Calif.-based Handspring lost $91.6 million. Earlier this year, Handspring dropped its stand-alone PDA business to concentrate on its Treo line of combination PDA-mobile phones, one of the prime allures for Palm.

Analysts said the acquisition would give the combined companies a better chance of cracking the market for all-in-one devices. Mobile phones are far more popular than PDAs, with more than 480 million expected to be sold this year, according to Gartner.

“It’s a much bigger market for Palm to shoot for,” Gartner analyst Todd Kort said. “They acquire a whole team that’s been working together for a long time, and get in position to be competitive in smart phones.”

Investors agreed Wednesday, boosting Palm’s shares $2.29, or 19%, to $14.44 and Handspring’s shares 17 cents, or 15%, to $1.28 in Nasdaq trading.

Hawkins and engineer and marketing experts Dubinsky and Ed Colligan formed Palm 11 years ago to bring mobile personal computing to the masses. Their original Palm Pilot is credited with reinventing the hand-held computer market. Hawkins built the prototype in 1994 with wood from his garage. He carried it around in his shirt pocket, pretending it was a real electronic device as he worked out the bugs.

Feeling hemmed in by a large corporate owner that refused to take the company public, Dubinsky and Hawkins left Palm and formed Handspring in 1998. Colligan joined them three months later.

Handspring’s initial public offering in June 2000 made the pair paper millionaires: Hawkins’ stake in the company was worth $819 million and Dubinsky’s was worth $441 million.

Palm parent 3Com Corp. spun off the division to shareholders three months before Handpring’s IPO.

If the deal closes as planned this fall, Hawkins, Handspring’s chief product officer, will become Palm’s chief technology officer. Colligan, Handspring’s chief operating officer, will run Palm’s smart phone operations. Dubinsky, Handspring’s chief executive, will join Palm’s board but will not have a day-to-day role with the company. Todd Bradley, currently head of Palm Solutions Group, will be chief executive of the new company.

Palm also said Wednesday that it would spin off its software group, PalmSource, to entice more computer and phone makers to use the popular Palm operating system.

Palm’s hardware division, known as Palm Solutions Group, would be the entity to merge with Handspring.

Under the agreement, Palm would exchange 0.09 share for each Handspring share, issuing a total of about 14 million shares. Handspring shareholders would own about one-third of the combined company.

The agreement requires the approval of shareholders and regulators.