Why Dell May Not Shake Hands With Palm On A Buyout

Speculation is mounting that Dell will launch a bid to buy Palm, the maker of the Treo and one of the pioneers of of the modern handset market.

For starters, Dell earlier this week killed its own Axim handheld line and, in the words of Dell blogger Lionel Menchacha, "Why did we make the decision? Because of a steadily declining market for pen-based PDAs and noted over the past several quarters by analyst firms like IDC and Gartner."

Michael Dell, upon returning to the CEO position earlier this year, has indicated the company would begin thinking differently and taking some bold action to get back on track. In addition, Dell has hired handset industry veteran Ron Garriques to run the company's consumer business. Hence, the speculation.

But a Dell acquisition of Palm isn't necessarily a slam-dunk. Consider:

* Dell would be hard-pressed to pay for Palm using shares of its own stock. The company has suspended its own share repurchase program and even its own executives have been told they can't buy or sell shares of Dell while the company remains delinquent in filing mandatory reports with the U.S. Securities and Exchange Commission;

* Dell certainly has the cash to buy Palm, reporting about $12.5 billion worth as of its most recent fiscal quarter. But most of Dell's cash is overseas and to repatriate it to the U.S. to complete a Palm deal could mean it would have to pay taxes to bring it back to the states. Palm's market cap is about $1.74 billion, so even without paying a premium for the company it could still cost Dell upward of $2 billion to $2.5 billion to complete a deal once tax payments and other costs are factored in;

* Palm shareholders would have to approve any takeover by Dell, and to do that they would need to perform due diligence. Dell could very well have to file financial disclosures as part of a tender offer, and make public its current finances. The company, though, hasn't been able to file its most recent second quarter 10-Q, its third quarter 10-Q or its 10-K because the Audit Committee of Dell's Board of Directors has been conducting a wide-scale investigation into Dell's accounting and financial reporting. In fact, that investigation has found accounting errors and deficiencies in Dell's financial controls and the company may yet have to restate several years worth of earnings. Given all that, it would be unclear how Dell could meet filing requirements to complete a formal tender offer for Palm;

If Dell could clear all of those hurdles, it would then have to close the deal at about the same time Apple is bringing its iPhone to market -- a product that almost assuredly will take market share from Palm right out of the gate, in addition to disrupting the handset industry.

Is there an alternative to an acquisition that might be more attractive to Dell? In the past, when it has wanted a quick entry into a market where it has lagged, Dell entered into OEM deals with companies like Lexmark and EMC. Those companies took care of the heavy lifting and shared a good part of the risk. An OEM deal with a handset maker could help Dell reach the same goals as an acquisition of Palm, but allow it to sidestep all the hurdles.