Thursday, May 31, 2007

Palm - Back up reading

In a move that could be described as "totally unsurprising," Palm shareholders have approved the much-discussed partial sale of the company to a private equity firm called Elevation Partners (of which Bono is a member), and also a change in the board of director's makeup. The plan is for Mr. MacPhisto and co. to pay $325 million for a 25-percent stake in the company, while Palm itself will pay out a $9 per-share distribution, or about $940 million in cash, to shareholders for their reduction in ownership.

There will also be a new executive board chair, namely, Johnathan Rubenstein, an Apple alumni who ran the iPod division from 2004-2006 and led creation of Apple's iMac computer before that, was part of the executive team that joined Apple after Steve Jobs returned to run the company. Fred Anderson (another former Apple officer), and Roger McNamee (a Silicon Valley investor) will also join the board. A commentator said of the switch, "There are a lot of moving parts here, but the goal is to bring in transformation and change the dynamics of the company. “Apparently, Palm has hopes that Mr. Rubenstein will help create "innovative products" and "bring them to market quickly."

OK, Lets line up some facts…about the road to death of a company…Palm is on the road to death. Gateway showed us the way – Dell didn’t learn from Gateway and made the same mistakes. Dell looks alive but they lost their customer base and confidence. Computers use to be like “new cars coming out.” Everyone waited for the features, the speed, better screens, etc.” Microsoft provided better programs (windows 98 and XP – probably the best for the PC.) These programs were heavily ladened and required much more storage – and the chip makers provided faster chips to manage the programs and storage and lightening speed. Lots of competition, every company up – lower prices led to computers becoming a commodity. So, everything became about service and durability. IBM could not compete in a commodity based product and sold out to Lenova – a Chinese based company. Dell will be headed in that direction – a brief and somewhat sketchy discussion of the Computer Industry – Except for Apple - who has about 5 to 10% of the market and a very faithful customer base (who feels that the Mac is in a category of itself and is far distant relative from the commodity called PC.

The PDA (personal digital assistant) arrived on the markets, more than 10 years ago, and PALM owned the space. RIM (Research in Motion) a Canadian company, came into the market with a slightly better approach and equipment – and over the years became the dominant player (actually creating an addiction based, life changing environment for its users “take whatever you want from me, but don’t take my Blackberry – please!” It appears that PALM just stood still, very little improvements, didn’t keep up…and Blackberry took over the market period.

Cell Phones and MP-3 players were being developed along with computers and PDAs at the same pace – and again became commodities like the computers, except for the Apple Ipod – and of course Blackberry had no competition.

Apple has been an incredible company, developing new and innovative products that have made them the leader in innovation with consumer loyalty and a product that put competitors to shame. So powerful was their entry into the MP-3 environment - they changed the entire music industry in less that a decade – better for them and very much worse for the “greedy” music companies and their entire manufacturing, distribution and retail empires. Apple, as everyone above 2 years old knows, has just entered the Cell phone arena with a product that has put all the cell phone manufacturers to shame. Only the Blackberry still shines because of it’s cell phone interface with their most appreciated PDA. Apples Stock on the NASDAQ sells for a price earnings ratio 40 and a forward estimated price earnings ratio of 30. They have products coming out and upgrades faster than you can think – full of amazing innovation and consumers at the edge of their chairs waiting.

RIMM (Research in Motion – Blackberry) Actually, is a one product company

a.k.a, “a one trick poney.” They have 8 million users – who feel their Blackberry is a 3rd hand in their lives – and are always awaiting innovative upgrades from RIMM – and they are awarded with them on a more than regular basis. RIMM’s stock on the NASDAQ and sells for a price earnings ratio of almost 70 and a forward price earnings ration of 30. (showing much faster earnings growth than apple – but the same forward price earnings ratio.) Some have said of the astronomical rise of RIMM’s price, is that it is justified by the fact it is the same as Apple – but no one is discounting the “one trick pony” concept or it’s vulnerability to disruption of service.

OK, the center of our discussion is three companies – 2 of the great, great companies who are currently considered giants and are favorite sons in the markets – and one company (PALM) who they (Wall Street) have measured the body and are beginning to build the casket.

What’s different here? Gateway consented to go down – Dell is looking at being alive – but the oxygen is slight….Palm, however, is not a commodity based company and has “assets” that are desirable for anyone looking to be a competitor in the PDA monopoly of Blackberry.

Apple’s Iphone has a 5 year contract with AT&T which does not allow them to have any customers other than AT&T – in the United States.

Some Very Successful retired executives of Apple along with Bono and a few others have just taken a 25% interest in Palm for $325 Million – which is less than table scraps (pennies) to them.

The Fantasy begins:

“Fantasy - An unrealistic or improbable supposition.- a capricious hallucination – by a highly fanciful mind, with nothing better to do then write this bull shit – and the time to do it”

$325 Million and more than 3 giant egos – don’t go into the mortuary and try to revive the dead. It’s been done before – if there is a success rate, it’s counted in decimal points of small fractions.

There is no question that Apple is going into the lucrative PDA market with the Iphone, Ipod combination. I’m sure they have 80% of the work required to advance this product to the market – done.

Apple is an innovator of operating systems (palms current Microsoft program is not really competitive.) Apple has everything except a few PDA programming techniques, which it could readily develop – and a name – Palm, BUT, Apple cannot enter the cell phone market in the United States for 5 years. And a PDA competitor of Blackberry better come into the arena within 3 to 9 months. As I related in the beginning of this document (2nd para.) “Apparently, Palm has hopes that Mr. Rubenstein will help create "innovative products" and "bring them to market quickly."

Again the Fantasy - Apple joins a partnership with Palm to provide support both in terms of equipment and software – so that Palm can be revived and be competitive. Apple people already have a 25% interest in Palm and not only know how to talk – “Apple Talk” - they helped invent it. Are they still friends?


In my dream fantasy, people who are apple bonafides are going to slowly acquire PALM stock over the next 3 months – faster if things progress and maybe none if obstacles appear early. Palm has 104million shares and a cash equivalent (including tax benefits) of $10 a share. The infusion of $325million for 25% - would, along with the distribution of $9 leaves $4 of cash and equivalents for a stock that will be selling for (15 – 9) $6 a share. Elevation Partners has lined up additional loans so that any change in direction will be easily financed. Currently, believe it or not PALM has a positive cash flow and earnings – A price earnings ratio of 25 and earnings of .54. After the distribution of $9 a share the market capital of the entire company will be $.7 Billion. Apple has $20 Billion on hand

Which increases at $3 Billion annually.

My dream left out the probable law suit between AT&T and Apple – no dream is perfect.

This isn’t any different than a large pharmaceutical company partnering with a small start-up to develop a drug. If successful, the small company is consumed by the large company – (4 ½ years in Apple’s case (AT&T – time remaining)

RIMM is a one-trick pony – they had a sever outage of their service in April of this year – it was a big story – the stock dropped – their other products – none.

Showed their vulnerability – IT WAS A VERY BIG STORY – last April.

Two weeks ago – early September- they had another outage – was I sleeping

Was it mentioned, anywhere, other than in the technical periodicals? Maybe I was sleeping – dreaming up this dream – fantasy.

OK, after I awoke, and I always make wrong decisions – I am going to PALM mid-term call options at “above the money” for little $ outlay. I am going to very short-term short RIMM – in and out with very little exposure – tight stops.

RIMM has a 2.3 Beta
AAPL has a 1.4 Beta
GOOG has a 1.02 Beta
MOT has a 1.13 Beta
INTC has a 2.06 Beta
HPQ has a 1.88 Beta

The Beta coefficient is a measure of a stock’s volatility in relation to the rest of the market. Beta is calculated for individual companies using regression analysis. Beta is also referred to as financial elasticity or correlated relative volatility.

The bigger the Beta – the faster the rise and conversely the faster the fall

The effect on options of a PALM one time $9 distribution

Ameritrade announced a one time $6 distribution

PER CONTRACT 1) 100 Ameritrade Holding Corporation (“AMTD”)
Common Shares
2) $600.00 Cash ($6.00 x 100)*

*The cash portion of the deliverable remains
permanently fixed as part of the option deliverable, and
does not vary with price changes of securities also
included in the deliverable
Example of owning calls when there is a substantial cash distribution

Taxability of $9 distribution - a dividend to the extent of accumulated earnings and profits and current year earnings – the remainder a return of capital

Taxability and other important information relating to the Elevation Partners and their acquisition:

From the Balance Sheet Retained Earnings (for financial statement purposes – not what is for tax purposes) is a deficit $431 million (-431) there is no deferred tax liability – but anything from -431 to -1 could be a difference.

Last year (financial statements) retained earnings reduced to -431 from -824
I believe this was due to an operating income of 100+ and a tax refund probably from carrybacks of 300+

Their year ends at 5/31/07 Past with 60+ mil profits the Retained earnings as of fye 5/31/07 is the current deficit of -431 Mil

From this information and a concept of renovating the company from top to bottom – of which many of the expenses should be written off I would assume that most of the $9 distribution will be a reduction of basis – meaning that whether one purchases calls at this time or the stock – the tax consequences should not be dissimilar

That’s my take – my only concern is the contract between AT&T and APPLE where there may be phrasing dealing with partners and assignees – and being considered ---partners and assignees, for this contract, will be considered as a principal to this contract (Apple)

Something to consider – Blackberry’s biggest provider is AT&T and possibly Apple can work within AT&T to do what is required to enter the market of PDA’s and reduce RIM’s hold on the market – RIM is powerful, Apple is devastating and more powerful! As a side note AT&T could also be a winner within the frame of the discussion in this paragraph. Just thru pricing, APPLE can have a devastating affect on RIMM (the one trick pony). Long PALM, long AAPL

Short RIMM.

OK, deal the cards.

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