Kaufman Brothers Argues PALM Could Be "Taken Under" (PALM)

In a research report released today, Kaufman Brothers analysts wrote that they are "Not surprised with recent acquisition talk; Risk is deal could be a take-under." It would appear that a lot of over eager investors came to the same obvious conclusion today, as Palm (NASDAQ: PALM) shares have fallen 12.09% after surging yesterday on the takeover chatter. Kaufman Brothers wrote that they believe a sale of the company would be the most favorable outcome for PALM, but that they remain concerned that an acquisition could be a "take-under" where shareholders receive less than the current market value for their stock. The firm has a $3.00 price target on PALM.

The analysts are maintaining their SELL rating on the Sunnyvale, California company, writing that "while we believe PALM has some value with its WebOS and tight integration of hardware and software, we maintain our SELL rating as we remain unsure of the company's prospects as an ongoing concern."

Volume in PALM has been heavy once again today, with over 43 million shares changing hands versus a daily average of just under 34 million. The stock is currently trading well above Kaufman Brothers $3.00 target price at $5.31. While risky, a short position in PALM could pay off in a big way. Kaufman is basing their $3.00 price target on their valuation of WebOS at $600 million. The analysts wrote, however, that "there have been several venture capital investments acquired for only $0.15-$0.50 on the dollar meaning our $3 price target could end up being generous." The other consideration to take into account is that PALM's leverage in any deal is not going to be very strong because the company is running out of money. They are being forced to explore strategic alternatives from a position of significant weakness. Therefore, any company that may be interested in an acquisition will likely press PALM for the best possible terms.