Palm is to buy Handspring in a deal expected to have "a profound impact" on the handhelds market.

The buyout will expand Palm's presence in the market for devices that combine voice and data with traditional handhelds, Palm executives and analysts alike predict. The deal is currently valued at $169 million, based on Palm's closing stock price on Tuesday, revealed IDC analyst Alex Slawsby.

Eric Benhamou, chairman of the board and interim CEO of Palm, said: "We expect this deal to have a profound and transformative effect on the handheld industry."

Group force Palm is currently made up of two companies; PalmSource, which develops the Palm operating system, and Palm Solutions Group. The move follows the announcement that PalmSource is to be spun-off later this year. Palm Solutions Group will merge with Handspring to create a new company with a new name, Palm said in a statement released Wednesday. The deal is subject to shareholder and regulatory approval.

The merged company will be led by Todd Bradley, Palm Solutions Group's current president and CEO. It will be split into two business units, one focused on handheld computing and one on smart phones, the company said. Ken Wirt, currently Palm's senior vice president of sales and marketing, will run the handheld unit, while Handspring President and Chief Operating Officer Ed Colligan will run the smart phone side.

Share deal Current Palm shareholders will receive shares in PalmSource when it is spun off, but Handspring shareholders will not, Bradley said. Both transactions are expected to occur in the third quarter of this year, Bradley said.

Handspring shareholders will receive 0.09 Palm shares for each share of Handspring common stock owned. The value of the shares will depend on the Palm share price after the spin-off of PalmSource, Palm said.

Palm's stock rose $1.74, or 14.3 per cent, to $13.89 in late-morning trading on the Nasdaq market yesterday. Shares in Handspring (HAND) rose $0.16, or 14.4 per cent, to $1.27.

Sales of handheld devices without voice capabilities have been falling steadily over the last two quarters, according to data from IDC. Palm is still the market leader for handhelds across all operating systems, but its lead over HP has been slipping.

"Palm needs a stronger foothold in the wireless space. Voice-centric products are where the future opportunities and revenue exist," Slawsby said.

Treo factor Handspring makes the Treo Communicator products for both GSM (Global System for Mobile Communications) and CDMA (Code Division Multiple Access) cellular networks. Palm offers the Tungsten W product for GSM networks, but it is expensive, and the Treo products feature more tightly integrated voice capabilities, according to Palm.

"By adding the Treo, it's clear we will meet customer requirements like no other competitor in this space," Bradley said.

Another key to the deal is Handspring's technical expertise, Slawsby said. Jeff Hawkins, Handspring chairman and chief product officer, will become the new company's chief technology officer. Hawkins set up Palm in 1992 with Donna Dubinsky, and both left Palm along with Colligan in 1998 to set up Handspring after 3Com Corp. acquired Palm. Palm was later spun out from 3Com in an initial public offering.

Hawkins developed the handheld computing device, and Bradley referred to him as a "visionary" during the conference call. Dubinsky, Handspring's current CEO, will join the board of directors of the merged company.

Handspring also brings expertise in negotiating deals with wireless carriers to the combined company, Dubinsky said on the conference call. This is an important step in bringing current and future Palm devices onto cellular networks around the world, she said.

Stiff competition Palm will have a tough time competing outside the US against smart phone vendors such as Nokia or Sony Ericsso, Slawsby said. However, Treo is a recognized brand name within the US, and Palm can build market share while developing future devices that approach the sophistication of the Nokia and Sony Ericsson devices, he said.

Palm will extend a $10 million line of credit for working capital to Handspring until the deal closes. This line of credit could expand to $20 million under certain conditions, Palm said.

The combined company will be based in Milpitas, California. About 125 employees will lose their jobs in the combined company, Palm said.