Palm Inc.’s plan to buy Boise-based Extended Systems gets approval from employees

Palm Inc.’s plan to buy Boise-based Extended Systems Inc. got generally favorable reviews by observers and employees last week – and showed how much the technology market changed in a year.

The maker of the popular Palm Pilot handheld computer (NASDAQ:PALM) announced March 6 that it plans to buy Extended Systems Inc. (NASDAQ:XTND) for $264 million.

“Generally, people are excited and positive about the acquisition,” Extended Systems spokeswoman Joanne Taylor said of employees. “Palm has a great potential for growth and a great potential for recruiting, and this is a chance for all of us to become involved in a big company that is on the move.”

Taylor said the planned acquisition “is very positive because Palm, a multibillion-dollar company, is going to have a location in Boise.”

Palm plans to make Extended’s operations the nucleus of Palm’s enterprise division, Taylor said. She said staffing may decrease a bit in the short run but probably will increase ultimately as Palm grows its enterprise-market (business-to-business) activity.

Most employees are to be retained, she said.

Palm plans to pay Extended stockholders – most of whom live in southwest Idaho – $22 per share. Extended stock ranged from just over $10 to $130 in the past year (ttm), largely reflecting the rise and fall of the technology sector.

Extended CEO Steve Simpson is to serve as general manager in Boise and report directly to Palm Inc. CEO Carl Yankowski, officials say.

Boise Certified Financial Planner Dave Petso said the deal, at $22 per share without a premium, is to some extent disappointing to shareholders who recall previous high prices of XTND stock.

“There were rumors of deals at higher (stock price) levels last year,” he said.

“The world was different a year ago. We thought technology would come quicker, and companies were spending more on technology,” said Petso.

Several former Hewlett-Packard Co. employees founded Extended 17 years ago. The company now employs 380. Its three-story 100,000-square-foot building was one of the first structures in the Boise Research Center, at Chinden Boulevard and Cloverdale Road.

Extended went public three years ago, made several acquisitions and established a strong market position in mobile information management (MIM) software for wireless computer-related products.

Holmes Lundt, vice president for business development for Extended Systems – who was Extended’s seventh employee in 1984 – helped put the deal together with Palm starting in September.

“This aligns the leading software technology company for MIM, Extended Systems, with the most preeminent mobile computer brand there is,” he said. He said the deal was “motivated by a fantastic business-strategy fit.”

Lundt noted that mobile enterprise software is projected to be a $1.3 billion industry by 2004.

Simpson could not be reached for comment following the March 6 announcement. But he said in a statement that the two companies match well.

“Extended Systems and Palm share a vision and have complementary products and culture. Together we significantly strengthen our ability to serve the needs of the explosive enterprise (business) market,” he said. “This move is a natural evolution as we join to create one end-to-end solution from a single vendor. It’s a win-win for customers, employees and stockholders.”

“A couple of areas are likely to be affected by the divestiture of the hardware businesses,” Lundt said. “The folks directly involved with the hardware business may find some transition to other job functions.”

Rich Valera, wireless-industry analyst and principal with Needham & Co. in New York, said the deal makes sense strategically for Palm, which seeks a stronger position in the business-to-business market.

“Palm is mainly a consumer-based product now, even though it’s used at work,” he said. “It does not have a mechanism to link directly to enterprise databases. “XTND enables remote users to link themselves up with corporate applications such as Microsoft Outlook or Lotus Notes or any enterprise application on an object-oriented database.”

“Palm intends to be as popular with corporate information officers as it is with individuals,” Yankowski said in a company statement. “Palm will be unmatched in its ability to deliver information to individual users and large organizations using a Palm solution or any mobile operating system or handheld device.”

Will Palm remain a consumer product?

“Absolutely. They just want to penetrate the enterprise market,” Valera said. “That (consumer application) is still a mainstay of the market, but they want to make it more of a corporate product.”

Extended Systems is one of the companies developing Bluetooth wireless technology. Extended Systems has licensed Bluetooth software to leading mobile device manufacturers including Palm, 3Com, Motorola, Hewlett-Packard, Fujitsu and Xircom.

Palm’s planned purchase of Extended won’t significantly change either company’s outlook relative to Bluetooth, Valera noted. Bluetooth has been slow in coming to market – common for heralded new technologies – and Palm already was a significant buyer of Extended’s Bluetooth software, he said.

“I don’t think it changes Bluetooth positioning or strategy,” he said. “It gives XTND a strong distribution channel for its software. They (Palm) are the worldwide leader in PDAs (personal digital assistants).”

“From Extended’s standpoint,” he continued, “they didn’t have a great balance sheet.” And the environment for the company to raise funding “was, for lack of a better term, not particularly friendly. This would eliminate any sort of liquidity issues.”

Extended has not been generating much cash recently, and has been spending, he noted.

Chief Financial Officer Karla Rosa, an Extended employee since 1991, said acquisition by Palm won’t impact the balance sheet in the short term, but will in the long run. “Palm has a very strong balance sheet and has a lot more cash in the bank than we do,” she said.

Company insiders hold 57 percent of XTND shares, according to Reuters. Petso estimated that Boise-area residents hold 75 percent or more of the stock.

Apparently, “the insiders thought it was a good deal,” he said. “They decided today they needed to do a deal with someone.” That indicates the extent that capital spending on technology has decreased recently, he said.

Communications Analyst Kevin Giboney of D.A. Davidson & Co. in Seattle, said it may be a while before the consumer market sees an affordable “killer application” in wireless, data-enabled services. “But you can justify the types of services that increase worker productivity and reduce costs of doing business.”

Bob Coleman of Dougherty Investment Group, Boise, said Extended was a candidate for acquisition for some time.

“The problem was trying to value the company. It wasn’t very heavily followed. There was not a lot of analytical data you could go by,” he said.