Nokia-Palm merger rumours get cool reception

While the rumour mill has been cranked up a gear with speculation that Nokia is interested in acquiring smartphone- and PDA-maker Palm, analysts have poured cold water on the union.

There was conjecture over the weekend that the world's number-one phone-maker had been sniffing around Palm following the Treo-maker's decision to explore a sale.

Palm has seen big changes in its business over the last few years. The company divided into two separate units: Palm for hardware, and PalmSource for the OS, the division that was later bought by Japanese Linux specialist Access, followed by a high-profile partnership between Palm and Microsoft.

Palm has also faced greater competition from a range of new entrants into the smartphone market, including Motorola and Nokia, as well as the emergence of a BlackBerry culture in enterprises in recent years. According to Reuters, Palm has engaged investment bankers Morgan Stanley to examine its strategic options, including seeking investment, selling the company or making acquisitions.

A report in The Wall Street Journal cited Nokia as the chief contender to get its wallet out but talk of such a union has provoked scepticism among analysts.

One major sticking point is the question of operating systems: Palm divides its devices between the Palm and Microsoft operating systems, whereas Nokia is firmly backing the Symbian OS for both consumer and enterprise smartphones and is highly unlikely to switch to using Redmond's efforts.

Carolina Milanesi, principal research analyst at Gartner, said: "It would mean a huge shift for Nokia in terms of embracing Microsoft, which I just don't see happening at the moment. People might criticise Symbian for not being enterprise-y enough but it's still a way [for Nokia] to differentiate themselves in the enterprise from what everyone else is doing with Microsoft."

While the Symbian operating system is not used exclusively by Nokia, it is often regarded as dominated by the company. In a recent interview, Palm chief executive Ed Colligan said the company would "never say never" on making a Symbian phone but had no plans to do so in the foreseeable future.

Colligan admitted, however, that European operators' fondness for Symbian has affected the company. At the 3GSM World Congress in Barcelona he said: "In the US, the Palm OS is so well established Symbian never got any traction. Here, operators are more supportive of Symbian."

As well as reported private equity interest, Motorola has also been cited as one possible bidder for Palm following a recent ramp up in its enterprise activities. The world's number-two handset maker recently acquired Symbol — which, like Palm, also runs OSes from Palm and Windows Mobile — while Moto has also recently upped its own smartphone presence by unveiling two new editions to its Microsoft-based smartphone range.

Geoff Blaber, research analyst at IDC, said Motorola would run a risk in trying to integrate another massive acquisition after the Symbol buy. He said: "Whoever acquires Palm also inherits a handheld business which is struggling and... Palm itself is struggling. Anyone who's going to take on Palm has got to have a strong play already in the enterprise space."

Blaber added that Palm's engineering capacity may be one of the more interesting elements to potential buyers: "Their software expertise is very strong, particularly as, at the moment, Windows Mobile is very competitive and anything that can be done to add value to the platform or differentiate through customisation is certainly a very strong incentive."

Some analysts believe that the attractiveness of Palm lies in its brand, and therefore a white-label device maker such as Taiwanese smartphone company HTC might make a more likely bidder.

Jeremy Green, principal analyst at Ovum, said buying Palm would be better suited to "a lower-tier player who doesn't have a brand name in enterprise but wanted to buy in big". He added: "[HTC and ZTE for example] don't have a brand and they do make smartphones — and they probably have the money as well."

However, if Nokia is attracted to Palm the brand might be one of its most charming assets for the Finnish provider. Palm is a popular name in the US where Nokia has traditionally struggled in the enterprise segment and punched below its weight in devices generally.

Green said: "When I've spoken to Nokia enterprise, they consider themselves in the shadow of both Palm and BlackBerry in North America so I suppose maybe they think doing that could buy share in North America, but it seems an expensive way of doing it."