As rumors run amok about who’s going to buy Palm, I have to point out what I did earlier: I can’t see paying a premium for this company. A lot of the reports are missing some basic facts, such as: Palm is losing money and has many liabilities. And it has a negative book value, according to numbers reported by Capital IQ.
In a world of rapid-fire news, blog, and opinion reports and itchy trigger-finger day traders, it’s fun to watch everybody jump on the Palm story. Bloomberg has reported that the company has engaged bankers to sell the company. People ate it up pretty quickly, buying up the shares on the news that the company is now officially on the block, thinking it would result in some sort of quick, generous return.But always remember there’s a key element in doing a deal: The price. It doesn’t always work in your favor.
Let’s catch up on the news coverage:
Palm Said to Tap Goldman, Quattrone to Find Buyers (Bloomberg).
Palm approached Huawei for acquisition talks (Reuters).
List of possible Palm suitors grows (Reuters).
Why would anybody want to buy Palm? (Network World).
Thinking about the Palm deal, I decided to look at the company as if I were considering the buying the stock on the raw numbers, without knowing anything about the “deals,” or the potential acquisition (this is how I like to approach all stock buys). After all, it’s the numbers that matter, right? If you are buying something you should be buying it because it has intrinsic value. Here’s what I found:
* Palm lost $265 million in 2009.
* It’s logged an operating margin of -27% over the last four reported quarters
* Return on assets: -21%
* Return on equity: N/A
* Revenue: $1B
*Revenue per share: $7
* Total cash: $591 million
*Total cash per share: $3.50
* Total debt: $391 million
* Palm’s balance sheet as of Feb., 2010: Total liabilities: $1B. Total assets: $1b. Net tangible assets: (505M).
* Book value per share: -$1.76
Source: Capital IQ
This is not a pretty picture. The biggest item, of course, is that the company has a negative book value: That means it has more liabilities than assets. It has a sizable cash position ($591 million), but that number is reduced by $391 million in debt.
These are not the kind of numbers I look for in a company, this kind of investment is just not my style. I prefer to find companies that are growing, making money, and whose shares are selling at a discount to the growth metrics.
That’s not to say there may not be somebody who finds value out there: I supposed the game with Palm will be if a large electronics manufacturer figures they can buy Palm, they will have $1B in revenue and the Palm brand, and then they will cut expenses and try to squeeze profit out of the company through the infamous “operating synergies.” This is also known as firing people.
Will it happen? Maybe. With so many red marks on its earnings statement and balance sheet, though, I just don’t see Palm having a lot of leverage in this negotiation Let’s face it, Palm is in a fairly desperate position. Investors who want to buy Palm on the acquisition rumors should know they are really just speculating on the fact that they hope the deal comes out with the right number for them.