Executives juggled four potential buyers before saying 'yes' to HP
Palm played off would-be buyers against each other to win HP’s billion dollar bid.
HP’s agreement to buy Palm capped an intensive round of bids from several other suitors, according to federal documents filed by Palm. The still unanswered question is: who were these other interested buyers?
A series of bids went down to the wire as Palm executives played off four companies against each other to finally gain HP’s winning $1.2 billion offer. Palm repeatedly stalled HP’s request for exclusive deal-making talks, keeping the playing field open to two other bidders and a last-minute suitor.
Palm users ‘giddy’ over HP’s buyout
Palm’s hunt for a rescuer began in earnest in mid-February, when it become obvious that revenues were falling far short of earlier projections, in light of continued weak user demand for Palm’s new generation of smartphones, based on its webOS system software.
The details emerged from Palm’s Schedule 14A proxy statement filed with the federal Securities and Exchange Commission (SEC).
Meeting in February, the board of directors learned that management was projecting revenues of just under $300 million for the quarter ending Feb.26, compared to a plan of $407 million. For the next quarter, it was even worse: expected revenues were barely one-third of the planned number. The softness was now expected to continue into the next fiscal year as well, causing Palm’s liquidity and financial condition to continue to wither. And that was in the face of rivals, including Apple, Research in Motion and a resurgent Microsoft with its Windows Phone 7 platform, all of whom had greater scale and much deeper pockets.
It was a bitter conclusion to the 2007 re-orientation of Palm, to focus on a new mobile OS, and the first device to use it, the Palm Pre. In the Fall of that year, the company recapitalized, with a new investment from Elevation Partners, and new stock offerings, eventually totaling near $900 million.
Palm’s board began looking at its options, including new financing, licensing webOS or sale of patents, and selling the entire company. The company retained Goldman Sachs and Qatalyst Partners as financial advisors and appointed a committee to explore the options.
By the end of February, the committee was assessing 24 potential strategic partners. After the disappointing first quarter results and future guidance were disclosed about the same time, the company’s stock fell to $4 per share by March 18.
During March, Palm and its financial advisors had contacted 16 companies, including HP. HP and five others agreed to non-disclosure agreements to review non-public Palm information in separate meetings. Palm asked three, including HP, to submit proposals for a buyout. The other two companies are not named in the proxy, being referred to only as Company A and B. A fourth, Company C, had been talking with Palm about an intellectual property deal but at the last minute proposed a buyout of the company.
During the latter half of March, Palm met with all three companies in separate meetings. Palm’s board didn’t abandon the idea of some kind of licensing or patent deal, but a sell-off of the company became the top priority. On March 30, the three suitors were asked for “written indications of interest in a potential transaction” including the amount and form of the consideration, financing plans and other issues.
HP responded first with an offer of $4.75 per share, and asked for a 30-day exclusive negotiating period. In two days, Company A made a cash offer for Palm of $600 million, while Company B offered a stock-for-stock transaction with no specified value for the deal.
Palm’s board wouldn’t grant an exclusive agreement, with two other suitors still in the field, unless HP improved its offer. Instead, HP just repeated its original offer. In the meantime, told by Palm that its offer was not competitive, Company A wasn’t willing to raise the ante. Palm also balked with regard to Company B, which had said that the transaction might take several months longer than usual to complete, something Palm was unwilling to accept, along with the uncertainty over what the final value of the deal might be for Palm’s stockholders. That’s when Company B opted out, and Company C suddenly stepped in, offering $6 to $7 per share on April 18.
On April 19, Palm sent draft merger agreements to both HP and Company C. Palm and HP senior management huddled over the next two days, after which, on April 22, HP boosted its offer to $5 per share, again asking for a 28-day period of exclusive negotiations. The same day, Company C told Palm it was lowering its offer to $5.50 per share and it, too, requested a period of exclusive talks.
The Palm deal makers flagged a range of potential snags in the Company C offer, including a higher potential for risk, and a $60 million termination fee if the deal didn’t go through based on certain conditions. The two groups “engaged in extensive negotiations” over three days but by the end of April 25 were unable to resolve their differences.
On April 24, Palm CEO Jon Rubenstein told the HP team that they needed to improve their offer “significantly and immediately.” HP responded later in the day with an offer of $5.70 per share. Palm was still negotiating with both companies. HP was closer than Company C to meeting Palm’s concerns in the merger draft now on the table.
Palm told Company C that another bidder had offered a higher value and more favorable terms. Company C decided not to raise its bid but did offer to buy some patents and take a non-exclusive webOS license, for a one-time cash payment of $800 million. Palm’s board rejected that offer.
At that point, Palm and HP deal makers were swapping revised and amended drafts of the merger deal in a round of meetings. Both Goldman Sachs and Qatalyst Partners signed off on the proposal. On April 28, Palm’s board voted unanimously to accept the HP deal.
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