Why Dell should buy Palm

If ever there was a Silicon Valley match made in heaven, this is it

Palm Inc. needs money to survive. Dell Inc. needs a handset business to compete. I think Dell should acquire Palm immediately. The union would benefit both companies, as well as investors, the industry and, most of all, users.

After years of wandering in the wilderness, Palm finally did the right thing. It completely restructured the company for innovation, changing executives, engineers, operating systems and even core assumptions about how a cell phone handset should operate. And finally, it replaced CEO Ed Colligan with former Apple Inc. executive Jon Rubinstein, who headed the development of the iPod.

Unfortunately, all this came two years too late. As a result, the company is not likely to survive as an independent company.

I predicted this fate way back in early 2007 (" The decline and fall of the Palm empire") when the company was still profitable and the economy wasn't in recession.

In that column, I wrote:

"The tragic story of Palm's fall from greatness is a history of squandered resources and misplaced effort... Palm merges with another company only later to be spun off. The company ignores the founders' direction, only to later acquire their start-up and take up its direction. Palm spins out the software division only later to buy back the rights to it. Palm gives up the Palm trademark only to later buy it back. How many times has Palm distracted, divided and plundered the company with spin-offs, acquisitions and mismanagement?"

Palm would benefit enormously from Dell's corporate culture, which is competitive, disciplined and, above all, consistent. As part of Dell, Palm could continue its trajectory with the Pre, the now-threatened "Pixie" project (which is a low-cost candy bar phone that runs Palm's WebOS and could sell for $99 or less) and the WebOS itself, which has enormous potential.

Palm needs the time to cultivate a developer community and ecosystem around the WebOS. It needs power and influence over Asian parts manufacturers and U.S. retail stores. Above all, Palm needs somebody to pay the salaries and electric bill until the new direction can bear fruit.

So what's in it for Dell?

Dell has a serious case of handset envy. Apple, of course, has the iPhone. HP has the iPaq. (No, I'm serious. The iPaq still exists!) Acer acquired E-TEN, and should be shipping an Android cell phone in November. Lenovo is working on an iPhone-like Android device for the Chinese market. Toshiba makes a range of Windows Mobile handsets.

In fact, Dell is the world's only major PC and laptop manufacturer to not offer a cell phone of any kind.

Back in January, rumors were flying that Dell would launch a new Android-based handset at Mobile World Congress. In late March, reports surfaced that carriers and others who saw the Dell prototype were disappointed by it.

The last thing Dell needs is another embarrassing fiasco like its pathetic attempt to enter the media-player market. In the wake of the stunning success and dominance of the Apple iPod, Dell came out with a line of me-too, ho-hum music players called Dell Digital Jukebox and DJ Ditty.

Dell simply doesn't have the design culture to produce a cell phone even approaching the Palm Pre -- let alone the iPhone -- in coolness, simplicity or appeal. The only way for Dell to be a serious player in the handset market is through acquisition.

Palm is the perfect acquisition for Dell. The Palm Pre targets exactly the kind of enthusiastic technical power user that already likes Dell laptops and PCs. The Pre isn't a dumbed-down consumer phone, a boring-as-wood business phone or an also-ran Android phone. It's the perfect flagship handset to launch Dell into the global handset in a big way.

Palm also has a strong legacy in business, which fits with Dell's positioning.

But most of all, Dell needs a multitouch operating system.

As I've said many times before in this space, the future of both desktop and laptop PCs is an iPhone-like multi-touch user interface. With both Microsoft and Apple dragging their feet, Dell is champing at the bit to get out there with multitouch netbooks, tablets and mini-tablets. As revealed by early demos, however, Dell doesn't have a clue, and current offerings don't have a prayer.

Guess who does know multitouch? The Pre launched Palm into the same class as Apple in terms of gesture, physics and multitouch user interface design and execution. Imagine the Palm Pre's user interface on a tablet!

Launching a WebOS-based convertible tablet application before Apple gets out its inevitable multi-touch tablet would put Dell in the leadership position for the future of PCs.

This is precisely the kind of shock-and-awe move that Dell needs to climb its way back into contention with HP for the number-one spot in the industry, de-commoditize its PC business and fight off the loss of customers to Apple.

Dell: Who you gonna buy?

The Wall Street Journal reported Friday that Dell CEO Michael Dell told a source that he expects to acquire a "significant-sized company" soon. Other evidence indicates that Dell is lining up its financial ducks for such an acquisition. The company is sitting on about $10 billion in cash, and Dell recently sold $1 billion in bonds.

Businessweeksuggests that Dell's acquisition targets could include BMC Inc., EMC Corp., Affiliated Computer Services Inc. (ACS), Symantec Corp., Motorola Inc. and -- you guessed, it -- Palm. Of all these companies, Palm is the cheapest to buy, with a market value of just $1.7 billion (the actual price would be higher).

Meanwhile, Palm is never going to get a better price than right now, while the company is enjoying warm-and-fuzzy press and good vibes on Wall Street in the wake of its Pre launch.

Either the merger won't happen, in which case both companies will continue slouching toward has-been status, or Dell buys Palm. In that case, the newly reconstituted company can rise to a position of dominance and leadership and bring sorely needed competition and innovation to the mobile space once again.

This marriage benefits everybody. I hope they do it.

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Mike Elgan

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