The open-source software Linux is making a bigger dent in China's ever-galloping mobile phone market.

US-based PalmSource, provider of Palm OS, a popular operating system powering handheld devices and smartphones, yesterday said it agreed to acquire Chinese mobile phone software firm China MobileSoft Ltd (CMS).

The acquisition, pending CMS shareholder approval, will help PalmSource create a Linux-based version of Palm OS.

CMS is developing a version of Linux for mobile devices while PalmSource currently sells two proprietary operating systems.

Under the deal, PalmSource would issue 1.57 million shares of common stock in exchange for the outstanding equity and rights to acquire equity in CMS.

Based on NASDAQ-listed Palmsource's current stock price, the deal is worth more than US$20 million.

The teaming-up with CMS will offer mobile phone makers a low-cost OS alternative to Microsoft's Windows Mobile and Symbian OS, made by London-based Symbian Ltd backed by global giants including Nokia, Ericsson and Motorola.

Linux will help PalmSource "create a critical mass market to enable us to compete in a global base," said David Nagel, president and CEO of PalmSource Inc.

He said the pairing with CMS will double PalmSource's software development capacity and immediately more than double its phone licensees in China.

CMS's mobile software is being used in 31 cellphone models being sold in China under 10 licensees.

PalmSource has previously been focusing on selling software to PDAs (personal digital assistants) and have been slow entering the smartphone market, which analysts billed as a blunt.

"Most of our licensees are shifting their focus from handhelds to smartphones. That's the future of the market," Nagel said.

Smartphones which combine phone functions and PC features are witnessing a rapid up-take and are outshining PDAs globally.

Smartphones appeal to business users, and are attracting an increasing number of average users.

China's smartphone market will triple annually between 2003 and 2006, Beijing-based Analysys International said yesterday.

The low-cost Palm OS for Linux will give an even bigger boost to China's smartphone market, Nagel said.

A low-cost Linux platform will help push down prices of smartphones, enabling such phones to be accessible to a mass market, Nagel said.

Wang Jiping, CEO of CMS, expects Palm OS for Linux to become the most advantageous platform for mobile phones in China in the future, as mobile phone makers can easily manage the software platform with an open-source platform.

The Chinese Government is increasingly looking at Linux as an alternative to proprietary software as part of its efforts to build a local high-tech industry through open-source technologies.

Nagel earlier said Palmsource was in talks with China's top two domestic mobile phone makers Ningbo Bird and TCL for licensing arrangements.

Currently, only one Chinese firm Lenovo has been licensed to use Palm OS in smartphones.