Palm yesterday announced the $170m (£106m) acquisition of rival Handspring, bringing together two of the pioneers of the depressed handheld computer market.

The deal marks the return of the founders of Palm to the company. Jeff Hawkins and Donna Dubinsky left five years ago, amid reported conflicts with parent company 3Com, to launch Handspring. Palm was spun off as a separate company in 2000.

Wall Street welcomed the deal. Palm shares were trading $1.13 higher at $13.28, while Handspring's were 10 cents better at $1.21. Analysts said the companies' products and sales forces were complementary.

Global shipments of handheld devices fell 21% in the first quarter, according to research firm International Data Corporation, reflecting a drop in spending by the corporate sector.

Handspring has struggled with losses. It has been trying to move away from organisers to combined personal assistants and mobile phones. But it remains the number two maker of handheld computers, behind Palm.

Palm is also losing money and facing competition from bigger corporations, including Microsoft. The merger will mean 125 job losses and will cut costs by $25m a year.

The Silicon Valley rivals will spin off PalmSource, the unit that makes the Palm operating system for handheld devices, leaving the rump as a pure hardware company.

Both transactions will take place in the autumn when the merged company will be renamed. The all-paper deal will see Handspring investors receive 0.09 Palm shares for each Handspring share they own.