Palm Coughs Up 25% Stake in Recapitalization

Battered in the tough, competitive market for smartphones, Palm  today agreed to sell a 25 percent stake to private equity firm Elevation Partners under a recapitalization plan that will bring former Apple executives into the mix.

Elevation will pay Palm $8.50 per share, a 16 percent premium over Palm’s closing price the last 10 days, totaling $325 million for the 25 percent stake. Palm will use these funds, along with $400 million of new debt, to pay shareholders $9 per share for a total of $940 million in the deal.

Should the deal close in Palm’s third calendar quarter, Jon Rubinstein, former senior vice president of hardware engineering and head of the iPod division at Apple, will join Palm as executive chairman of the board. Fred Anderson and Roger McNamee, managing directors and co-founders of Elevation, will join Palm’s board of directors.

The three new board members will replace Eric Benhamou and D. Scott Mercer, who will resign from Palm’s board of directors when the deal is consummated.

With the impending appointment of Rubenstein, Palm will look to capture some of the iPod magic the engineer conjured at Apple. According to a Palm statement, Rubenstein was “instrumental in conceiving the iPod” and also infused USB and Wi-Fi into Apple’s Mac PCs.

Anderson also worked at Apple as CFO until 2004, and is credited with its financial turnaround, including solving a liquidity crisis.

Gartner analyst Todd Kort praised the personnel moves in an e-mail to internetnews.com.

“These guys [Rubenstein, McNamee and Anderson] are well-regarded in Silicon Valley, and they could help Palm break out of the catatonic spell that has engulfed their hardware engineering team,” Kort wrote.

“They replace some dead wood on Palm’s board of directors with people with fresh ideas and a strong track record of achievement.”

Palm struggles in the smartphone market versus Nokia , Research in Motion (RIM)  and Motorola. In March, Palm reported a 61 percent drop in third-quarter profits despite selling a record 738,000 Treo smartphones.

Palm’s poor financial performance has spurred rumors of a buyout, with Nokia or Motorola named among the suitors.

However, Motorola  is currently sailing through some rocky waters of its own with respect to its finances and challenges about CEO Ed Zander’s leadership by investor luminary Carl Icahn.

All evidence indicates Palm is trying to avoid a buyout.

In addition to the recapitalization, the company last week introduced the Palm Foleo companion for the Treo line. Foleo features a 10-inch screen, instant-on, full QWERTY keyboard and a battery life of up to five hours.

However, Kort said Foleo was a disappointing “dud that will soon be forgotten along with the LifeDrive i705 and similar products that never panned-out.”

Investors greeted Palm’s recapitalization news favorably, with shares trading up $1.45 to $17.54 in morning trading. Palm expects to announce fourth-quarter fiscal results on June 28 after the market closes.