Tokyo Firm to Acquire PalmSource

PalmSource Inc., maker of the Palm operating system for hand-held computers, said Friday it had agreed to be acquired by Japanese software company Access Co. for $324 million.

PalmSource’s stock surged 78% on the news.

But some analysts wondered how PalmSource, which had failed to excite investors since Palm Inc. spun it off two years ago, could draw such an offer.

“This was really dumb,” said Needham & Co. stock analyst Charles Wolf. Access is “paying that kind of money for a company with no real profits and one product. I’m stunned.”

Tokyo-based Access agreed to pay $18.50 for each share of PalmSource common stock, an 83% premium to the stock’s Thursday closing price of $10.09. PalmSource shares rose $7.89 to $17.98 on Friday.

PalmSource has seen its market share erode since its separation from Palm Inc., a darling of tech investors in the high-flying 1990s. Microsoft Corp. and Symbian have in recent months gained ground in the market for hand-held operating systems.

In June, PalmSource said it was cutting its full-time workforce in the U.S. by 16% and reorganizing key departments. At the time, the company posted an operating loss of $700,000, or 4 cents a share, for the quarter ended June 3, excluding a $26.7-million gain from the sale of its interest in Palm Trademark Holding Co.

Nevertheless, more than 45 companies worldwide have licensed PalmSource software. More than 39 million mobile devices run on the Palm OS.

Access produces the NetFront Internet browser for mobile devices. By acquiring PalmSource, it is positioning itself to offer phone makers more applications as well as the Palm OS, said Forrester Research analyst Charles Golvin.

The problem is that while the Palm OS ran a slew of traditional hand-helds, that business is “drying up” Golvin said. The trend in hand-helds, says Golvin, is moving toward smart phones.

“Questions about PalmSource revolve around growth and future devices,” he said. “How much penetration can the Palm OS grab in the future?”