In addition, Palm announced that they will spin-off their PalmSource subsidiary into a separate company.

"These two bold moves will serve as a powerful catalyst to transform the landscape of the handheld industry. The strategic choice of merging Handspring and the Palm Solutions Group of Palm will create the broadest portfolio and the most-experienced leadership team in the industry, fully capable of delivering value to customers, partners and shareholders," said Eric Benhamou, Palm, Inc. chairman and chief executive officer, and chairman of PalmSource. "And the spin-off of PalmSource will help grow the Palm Economy, attract additional licensees and unlock shareholder value."

Palm currently consists of two businesses - PalmSource, a subsidiary responsible for developing and licensing the Palm operating system, and the Palm Solutions Group, a business unit responsible for designing, making and marketing handheld devices. Immediately following the completion of the spin-off, Handspring will be merged with Palm.

The transaction, encompassing the spin-off of PalmSource and the merger of Handspring with the remaining Palm Solutions Group of Palm, is expected to close in the fall, subject to certain conditions.

Under the proposed terms of the transaction, and following the spin-off of PalmSource, Handspring's shareholders will receive 0.09 Palm shares -- and no shares of PalmSource -- for each share of Handspring common stock owned. Palm will issue approximately 13.9 million shares of Palm common stock to Handspring's shareholders on a fully diluted basis. As a result of the merger, Handspring's shareholders will own approximately 32.2 percent of the newly merged company on a fully diluted basis, and Palm's shareholders will own approximately 67.8 percent.

The value per share to be received by Handspring shareholders will be based on the Palm share price following the spin-off of PalmSource. The spin-off of PalmSource will be completed immediately prior to the closing of the Handspring acquisition.

Acquisition Rationale: Operational Excellence and Proven Innovation

The merger is designed to create a stronger competitor in handheld computing and communication solutions. Palm Solutions will become better able to realize its stated objectives of growing the market, maintaining industry leadership, and achieving consistent profitability. The strategic and operational benefits to the merged company include:

• Maximizing Palm and Handspring's combined scale and operational excellence to take full advantage of future growth opportunities;
  
  
• Delivering an unmatched portfolio of innovative mobile products from traditional and multimedia handhelds to wireless handhelds and smart phones;
  
  
• Adding Palm's strong brand and distribution channels to Handspring's highly regarded Treo product line and carrier relationships; and
  
  
• Enhancing the Palm management team -- including hardware and software design, engineering, and marketing -- to help drive handheld computing into deeper and broader solutions.

The merged companies expect greater revenue opportunities. They also expect to obtain improved operating efficiencies of approximately $25 million in cost savings annually. The cost savings assume combined employee reductions of approximately 125 people, elimination of overlapping programs and unnecessary real estate, and the advantages of increased volume in manufacturing and distribution. Handspring employees are expected to move to Palm Solutions headquarters in Milpitas, Calif.

Merger of Leaders

"This is a merger of leaders -- the world's leading maker of handheld computers and a global leader of Palm OS based smartphones," said Todd Bradley, Palm Solutions Group president and chief executive officer. "Having the best and broadest portfolio of innovative products that deliver what matters most to customers, sold by a robust channel and built from a foundation of operational excellence, is the best formula to expand our young, promising markets."

"Palm and Handspring share a vision that handheld computers and smartphones have the potential to redefine the landscape of personal computing," said Donna Dubinsky, chief executive officer of Handspring. "This merger brings together the best teams in the industry, and strengthens us to realize this vision."

The merged company will be led by Bradley, who will continue as president and chief executive officer, and will be structured around two business units: handheld computing solutions, led by Ken Wirt, currently senior vice president, sales and marketing, for Palm Solutions; and smartphone solutions, to be led by Ed Colligan, current president and chief operating officer for Handspring. Jeff Hawkins, Handspring chairman and chief product officer, will become chief technology officer for the merged company.

"The vision and leadership that Jeff and Ed have brought to the industry will be tremendous assets to the Palm Solutions management team. Together, we'll advance the industry in ways never before possible," Bradley said.

The completion of the acquisition is conditioned upon several legal and technical obstacles, including anti-trust review and the approvals of shareholders of both Palm and Handspring. However, Palm has received voting commitments from Dubinsky, Hawkins and Colligan to vote their combined 37.5 percent ownership of Handspring's in support of the proposed merger.

Also as part of the merger agreement, Palm will provide an initial $10 million line of credit to Handspring for working-capital purposes until the transaction closes. Under certain conditions, the line of credit may increase to $20 million, and its maturity may be extended.

More to come on this breaking story...