Rumors that smartphone and PDA maker Palm might be up for sale have been swirling for months—and, unfortunately, were not eased by the company’s high-profile but poorly-received announcement of its Palm Foleo palmtop device. Now the company has announced a major “strategic recapitalization” which will see Palm taking in $325 million from equity firm Elevation Partners in exchange for 25 percent in the company. Furthermore, palm will be adding two former Apple executives to its company board—Jon Rubinstein, former head of Apple’s iPod division, and Fred Anderson, formerly Apple’s long-time CFO—along with Elevation’s Roger McNamee.
“As a result of this transaction, we will strengthen the Palm leadership team and create a more effective capital structure, which puts us in a great position to attract new talent, significantly strengthen our execution capabilities, and deliver long-term shareholder value,” said Ed Colligan, Palm president and CEO, in a statement
Elevation Partners is a nearly $2 billion dollar private equity firm whose best-known partner is U2 frontman Bono. Anderson and McNamee are also founding partners. Fred Andserson most recently made headlines by settling charges with the SEC—and paying some $3.5 million in penalties—over stock options backdating at Apple, then publicly contradicting Apple CEO Steve Jobs’ recollection of events.
Under the deal, Elevation will purchase $325 million of preferred Palm stock at $8.50 per share, meaning Elevation will own about 25 percent of outstanding stock in the company. In addition, Palm has secured $400 million in new financing and a $40 million revolving credit facility. Elevation’s investment and the $400 million will be used in part to finance a cash distribution of $9 per share to investors. Palm estimates that nearly $940 million will be paid out to investors; Elevation will not be eligible to receive cash from the distribution. The payout will reduce the proportion of the company owned by current shareholders to about 75 percent.
When the transaction closes, Job Rubinstein will stop in as the executive chairman of Palm’s board; Rubinstein formerly served as Apple’s senior VP of hardware engineering and the head of Apple’s iPod division. Elevation’s Anderson and McNamee will join Palm’s board of directors, replacing Eric Benhamou and D. Scott Mercer; with the addition of Rubinstein, Palm’s board will expand from eight to nine seats.
The cash infusion may help the struggling PDA and smartphone maker get back on its feet. Palm has struggled for years to move from the languishing PDA market into smartphones, and has fought a tortuous battle to over its own Palm OS, first selling the operating system then being forced to buy back a perpetual license. However, in the wake of the announcement of the Palm Foleo, analysts aren’t sure what, if anything, Palm may have up its sleeve which makes it an attractive investment target.
“This is by far the largest investment that Elevation has ever made, which reflects our enthusiasm for Palm and its opportunity. This investment fits perfectly with Elevation’s investment strategy of partnering with great management teams to transform businesses in industries with dynamic technology change,” said Roger McNamee. “We see Palm as uniquely positioned to deliver the integrated software and hardware solutions that will drive the next generation of mobile computing.”