Palm Ripe for Takeover as Analysts Slash Ratings?

Is Palm Inc. (PALM) ripe for a takeover? The company on Tuesday suffered a serious stock drop as analysts cut the mobile device maker’s ratings and pointed out its dwindling cash reserves. As Palm struggles to find its footing in an incredibly competitive market, its best option may be to merge with a stronger rival.

The speculation comes as Bank of America/Merrill Lynch, for one, downgraded its view of Palm. Palm’s “superior platform features” have not translated into enough carrier contracts or consumer demand, Vivek Arya wrote in client memo. And the “window of opportunity” might be closing as Google’s Android operating system gains ground, the iPhone boosts its market share and as Microsoft finds new life with Windows Phone 7, Arya wrote.

On top of that, Palm only has $130 million in cash left – and we’re talking about an opex-intensive sector.

“Palm’s options may be limited,” Arya wrote, who cut Palm’s rating to underperform (which means sell).

Other industry observers seem to agree. MacQuarie Research’s Phil Cusick slashed his rating on Palm stock to neutral, or hold, citing weak Palm device sales since launching with new partner Verizon Wireless in January. Last year, Sprint Nextel Corp. (S) was the first carrier to offer Palm phones – the Pre and Pixi. But now sales at Verizon are sluggish and Cusick said interest from providers, including AT&T Inc. (T), is weak.

Another analyst, Sanjiv Wadhwani of Stifel Nicolaus, fears Palm will have to compete too much on pricing and promotions to succeed. If that happens, operating leverage will be “difficult to come by in the face of margin pressure,” Wadhwani wrote.

Wadhwani rates Palm at hold.

Palm’s shares dove the most since March 2009 on the ratings cuts. By 11:53 a.m. Eastern, prices had dropped 6.92 percent to $8.48 – and that was not the biggest drop of the morning.

So if Palm has to start looking for a deep-pocketed parent, who is the best choice?

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