Extended Systems' products help workers "access, synchronize, collect, retrieve and print" information on the go, according to the company's Web site.
"We think this is the next large growth market in the enterprise," Palm CEO Carl Yankowski told CNET News.com.
The deal will allow Palm to offer a handheld infrastructure that can go behind a company's firewall and support not only handhelds using its Palm operating system, but also products using rival operating systems. The acquisition is also leading Palm to reorganize its corporate structure.
CIBC World Markets analyst Thomas Sepenzis praised the deal.
"This is exactly what Palm needs," Sepenzis said. "This gives them very deep reach into the corporate market."
Under the agreement, Palm will offer $22 worth of its shares for each Extended Systems share, although the valuation is subject to several restrictions.
The $22 offer is below Extended Systems' price before trading was halted around 11:30 a.m. PST Tuesday. The halt came after The Wall Street Journal reported on its Web site that a deal could be announced. Before the halt, Extended Systems' stock surged $3.50, or 18 percent, to $23.13.
Shares of Palm closed up $2.06, or 12 percent, at $19.38.
Palm Chief Financial Officer Judy Bruner said in a conference call that the deal will cut Palm's operating earnings by $15 million in the fiscal year that begins in June. Some of that dilution will come because Palm plans to exit Extended Systems' printing and Internet hardware businesses, which accounted for 54 percent of the company's $13.8 million revenue last quarter.
With the acquisition, Yankowski said in an interview, Palm will offer its corporate services to customers using handhelds that run either the Palm OS or Microsoft's Pocket PC operating system.
"We're agnostic," Yankowski said.
Although that may be a bit of an overstatement, executives at both Palm and Boise, Idaho-based Extended Systems said that corporations don't want to be tied to a particular operating system.
"The corporate IT folks, they don't want to be locked out," Extended Systems CEO Steve Simpson said. He added that the industry is in a transition in which handhelds, once seen as nuisances by corporate information technology managers, are beginning to become a key part of business computing plans.
Extended Systems, founded in 1984, already works with a number of corporations, including British Airways, International Paper, Cadbury Schweppes, DaimlerChrysler and British wireless firm Orange.
Sepenzis said the ability of Extended Systems' products to communicate with different types of handhelds will be a big advantage for Palm.
"The only other player that can do that is AvantGo," he said.
The key for Palm, Sepenzis said, is delivering on its promise to release by year's end a handheld capable of always-on Internet access, access to corporate e-mail and immediate notification of new e-mail messages.
As for the purchase price, both executives noted that the value of the acquisition shifted widely while they were ironing out the stock deal.
"That's an understatement," Yankowski said.
Simpson said he believes Extended Systems' shareholders got a fair deal given "the volatility of both our stocks, particulary ours."
Yankowski said Extended Systems' roughly 350 employees will form the core of Palm's corporate efforts, which will become one of three business units at Palm under a reorganization. Simpson will head that unit, dubbed the Enterprise Solutions Group.
The Individual Solutions Group will focus on handheld devices, content, and mobile and wireless access. Satjiv Chahil, Palm's chief marketing officer, will head that group until a permanent general manager is named.
The third unit, responsible for developing and licensing the Palm operating system, will be headed by Alan Kessler, Palm's co-chief operating officer.
Barry Cottle, the fellow co-chief operating officer who has headed the company's content and Internet access business, has been named chief Internet officer.
The deal is expected to close in June.
This is Palm's first acquisition of a publicly traded company since its spinoff from 3Com last year. Palm made several acquisitions of private companies last year, including the purchases of e-mail company Actual Software, calendar service Anyday.com and software maker Wesync.com.