Same Palm, Different Day

Score another one for private equity investors.

On Monday, Palm (Nasdaq: PALM  ) announced that Elevation Partners -- an investment firm which counts U2 vocalist Bono, former Apple (Nasdaq: AAPL  ) chief financial officer Fred Anderson, and longtime tech investor Roger McNamee as partners -- will supply it with $325 million in fresh capital in exchange for a 25% stake in the company.

And just like that, nothing has changed. I'll get into why in a bit. First, let's talk details, beginning with the backstory for Elevation Partners.

Hiking a mountain of cash
Elevation began life as a $1.9 billion private equity fund in 2005. On Nov. 3 of that year, the firm made its first investment, pledging $300 million to create a partnership between video game developers BioWare and Pandemic Studios.

Four days later, a $100 million investment in online real estate services firm Homestore, now known as Move (Nasdaq: MOVE  ) , followed. Then, last summer, the team agreed to supply the Forbes family with cash to expand its media empire in the digital realm. Most recently, there's the deal for Palm.

Risk? What risk?
We don't know much about Elevation's earlier investments, but from my read of the details of the Palm stake, the partners have no problem making risky bets. Here, they seem to believe that the potential rewards will be too huge to ignore.

Per the deal, current shareholders will receive $940 million in capital in the form of a $9 per-share dividend. Some of that will be paid from Palm's existing $504 million cash hoard; the rest will come from Elevation and $400 million in new debt.

Payments won't be made until the third quarter, when the deal is expected to close. The stock price will then be adjusted to subtract the cost of the dividend. At today's price, backing out the $9 dividend values Palm at a post-distribution price of $8.57 a share. Elevation's stake is convertible at $8.50 per stub.

Reading a new Palm
So shareholders will get some money back, and a smaller stake in a recapitalized smartphone vendor. What does Elevation get in return? Control.

Anderson and McNamee will join the board, and Jon Rubinstein, who once led Apple's iPod team, will join the company as executive chairman. Rubinstein is a potential coup, having led the reorganization of Apple's hardware group; he also oversaw the release of the video iPod and the iPod nano. Clearly, he's an innovator.

But so is Palm co-founder Jeff Hawkins, who was the brains behind the now-deceased PalmPilot, the Treo smartphone, and the less-than-thrilling Foleo. No one is saying so explicitly, but naming Rubinstein as executive chairman and the head of product development probably means the end for Hawkins, who had been working part-time in recent years, according to The Wall Street Journal.

Call it the end of one era, and the beginning of another. Palm's presentation says it's working on a Linux-based software platform that appears to be a replacement for the aging Palm OS, which has been upstaged by Microsoft's Windows Mobile globally -- and in some Treo smartphones.

Rattle and creak
The irony of this deal for me: If Rubinstein is able to capture some of the same magic he brought to Apple, Palm could re-emerge among Silicon Valley's elite. A Rule Breaker in the making, if you will.

But I think that's a long shot. Palm has never been short on innovation. If R&D really were the answer here, investors wouldn't be wincing at this chart. And Apple would have no reason to introduce the iPhone.

Here's the ugly truth: Palm didn't execute. If it did, the Treo would have trumped Research In Motion's (Nasdaq: RIMM  ) BlackBerry when a patent dispute had its rival crippled. Instead, Palm suffered inventory problems and delays, and RIMM is resurgent.

I wish Elevation, Rubinstein, and the existing team at Palm the best. They deserve the second shot this recapitalization provides. I just don't believe that the outcome will be any different. At least, not until the remaining executives realize the harsh truth: They stink at running the business they've created.

Palm is a Stock Advisor pick. For 30 days of free access to the entire portfolio, which is beating the market by nearly 38%, sign up for a no-obligation trial subscription.

Microsoft is an Inside Value selection.

Fool contributor Tim Beyers, ranked 3,493 out of more than 29,700 in CAPS, still owns a Treo 600. He's planning to beat it up till it dies. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Tim's portfolio holdings can be found at his Fool profile. His thoughts on Foolishness and investing may be found in his blog. The Motley Fool's disclosure policy has to take a call. Would you excuse us, please?


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