Insiders loading up at Palm, Inc (PALM)

I smell a buyout at Palm, Inc. (NASDAQ:PALM) -- why? Check out their insider buying since March:

The same Directors that bought at the $6 low back in March are now buying again at $16.25? I would think that they would be selling at this point to take their profits, unless they know something we don't...

Acquisition rumors are always flying around with Palm. Darcy Travios at Forbes.com makes a good case as to why Nokia would buy them out:

Nokia continues to dominate market share in the mobile phone category, yet Nokia's smart phone offerings have disappointed consumers and investors. The recent launch of Nokia's smart phone, the N97, in June yielded sales of only 500,000 units in the quarter. Apple ( AAPL - news - people ) sold over 1 million iPhone 3GS in its first weekend, and Palm, a much smaller with limited distribution, sold 207,000 units during the comparable period. Palm went on to sell a total of 832,000 smart phones in the quarter just announced.

In the important and opinion-leading U.S. market, Nokia does not even rank among the top 10 smart phone models. Research in Motion ( RIMM - news - people ) BlackBerrys occupy four slots (including the top seat), Apple's two models are both in the top 10, HTC has three and Palm has the eighth position. The acquisition would provide Nokia a top slot in the U.S. market it hasn't been able to crack, despite Nokia's reach, brand and resources. Palm appears to have the more momentum and buzz, at least for now.

Yet Nokia is committed to the smart phone sector. On their last conference call, Nokia management reiterated its intent to create significant value and develop new skills to become a solutions company for the transforming mobile industry. Nokia's R&D runs about $8.1 billion (12% revenues) a year. Palm's market capitalization is $2.4 billion, therefore the purchase of Palm would be less than one-third of Nokia's annual R&D budget, and provide Nokia with at least one objective of its R&D spending--a compelling product in the high end of the smart phone market. In addition, Nokia would also inherit the new Palm Pixi, the smaller, less-expensive smart phone. The Pixi has gotten impressive reviews for its styling, its thinness and its features and, at a lower price point, the Pixi could be a home run, particularly with Nokia's distribution channel behind it.

Most importantly, Nokia would get Palm's DNA.

Palm grew up in Silicon Valley, and has its roots in the computer industry. Nokia has dominated the cellular industry. Their heritages are very different and, for years, the cellular industry has considered the computer industry as an interloping step-sibling intruding on how the world “really” communicated. The cellular guys considered data as an add-on feature, always second to voice. But now, as market share numbers from Apple, Research in Motion and Palm climb, the traditional cellular players have to pay attention and heed convergence. Palm + Nokia = voice + data. Classic combo.

Buying Palm would give Nokia a legitimate foothold in Silicon Valley, with its financing partners, Elevation Partners (Roger McNamee, well-known technology investor and part owner of the company that publishes Forbes), its current CEO, Jon Rubinstein, the Apple alumni who managed Apple's innovative iPod and iMac products, and their combined teams, talents and networks. As Nokia moves beyond traditional voice-centric products to mobile data-centric products, such as its recently announced Booklet, the Silicon Valley data-centric insights on product development and Palm's development team would be timely and critical.

Historically, Palm has done two things really well. First, it has been effective at changing users' behaviors, as witnessed by the ubiquitous electronic calendar. Very few companies have achieved this. Second, Palm has been effective at delivering stylized consumer electronics to the market at the price points acceptable for adoption. Nokia has been challenged here. Nokia has introduced innovative products over the last 10 years, but either at too high of a price point or without enough buzz to be embraced by the consumer, in the premium category.

For Palm, the advantages are obvious. Palm has been burning through cash at a good clip; over $45 million was used by operations last quarter. Despite its highly successful secondary offering raising over $300 million this week, Nokia's deep pockets would take the pressure off. More importantly, however, is Nokia's distribution channel, which could open up markets to Palm at a much faster pace, enabling Palm to seriously challenge Research in Motion, particularly in the enterprise, Research in Motion's stronghold.

With Nokia's market capitalization at roughly $58 billion and Palm's current market cap of $2.4 billion with a 25% premium from here, acquiring Palm would be about 5% of Nokia's market capitalization. Is Palm worth that to Nokia? First, it would provide Nokia an entrée into the very attractive and more profitable high end of the smart phone market. Devices comprise nearly two-thirds of Nokia's revenue, so a stronger position in this segment is important to the company. Second, Nokia intends to introduce more mobile devices into the market, moving from its comfort zone of voice-centric devices to data-centric devices. Palm's insights and perspectives could short cut development time and assist Nokia in introducing more compelling stylized products to the market. Third, Nokia could help Palm ramp into new markets faster through its distribution clout, thereby accelerating Palm's track to profitability. This, in one swoop, would overcome Palm's two current challenges: distribution and profitability.

However, Nokia has repeatedly pledged that Symbian is its foundation from which its solutions will emerge, and a shift to the Palm webOS would constitute a dramatic change of course for Nokia, rendering an acquisition unlikely. But then again, less than 30 years ago, Nokia was a timber products and rubber boots company, so we'll have to wait and see.