Palm Gets Needed $100M Infusion

The holiday season came right on time for Palm, which today announced a $100 million investment from Elevation Partners.

The influx of cash aims to help the troubled handset manufacturer shore up its operations and deliver new products. It also marks the second equity investment by Elevation Partners, which poured $325 million into Palm’s (NASDAQ: PALM) coffers in June 2007.

“The additional capital will enable us to put added momentum behind the new product introductions scheduled for 2009 and provide us with enhanced stability in unsettled economic times,” Ed Colligan, Palm’s president and CEO, said in a statement.

Through the deal with Elevation, the VC firm will pay $3.25 per share, a 31 percent premium on Palm’s closing price last Friday. Following its latest investment, Elevation Partners becomes Palm’s largest shareholder, owning about 41 percent of the company, according to Lyn Fox, Palm’s vice president of corporate communications.

News of the transaction sent Palm’s stock price soaring to a peak of $3.68 per share late this morning, up more than 47 percent. At press time, shares of Palm had slipped back to $2.98 — still up 20 percent.

The investment couldn’t come at a better time for Palm, which is struggling to gain traction in the high-stakes mobile device market — currently dominated by the likes of Nokia, Blackberry maker Research in Motion and newcomers like Apple, with its iPhone. According to a December Gartner report, Palm held 2.1 market share in smartphone sales for the third quarter of 2008.

And despite pushing a string of new products this year, Palm has been unable to reverse its slipping fortunes. Last week, the company posted disappointing dips in both smartphone unit sales and revenue for the second fiscal quarter of 2009.

Palm’s revenue totaled $191.6 million, a 45 percent drop from $349.6 in the previous quarter. It reported a net loss for the quarter of $80.2 million, or 73 cents per share — well below Wall Street’s expectations of a 38 cents per-share loss, according to Thomson Reuters. At the end of the quarter, the company had about $224 million in cash and short-term securities on hand, it said.

A plan for Palm?

Three-year-old Elevation Partners is best known as the private equity firm co-founded by Bono, lead singer and co-founder of the rock band U2. Other co-founders include former Apple CFO Fred Anderson, Marc Bodnick, a founding principal of Silver Lake Partners. The company has said it has nearly $1.9 billion in committed capital for investment over the next six years.

Despite Palm’s current woes, the firm has high hopes for its latest investment once it closes at the end of January, following customary closing conditions.

“We believe that Palm is in a position to transform the cell phone industry, and we are pleased to have the opportunity to make this additional investment in the company,” Roger McNamee, co-founder of Elevation Partners, said in a statement. “We are proud to be associated with the company and look forward to great things from Palm in 2009 and beyond.”

Palm, meanwhile, is banking a large portion of its turnaround on a new mobile operating system that is slated to be ready by year’s end — and which, it’s hoping, will find traction among consumers. During its earnings call Thursday, Colligan also reiterated earlier promises that new smartphones, built on that new Linux-based platform, will arrive in early 2009.

It expects to begin shipping those handsets during the first half of the year.

“Windows Mobile will continue to be our platform of choice for enterprise deployments of these types of devices,” Colligan added during the call.

Also during the call, the CEO blasted one analyst’s suggestion that Palm’s profitability ship may have sailed.

“I think that’s ridiculous,” he said. “The chance that there’s not another opportunity ahead [for us] or we can’t build a platform position here is not real.”

“We knew at some point it was likely that Centro would hit the wall,” he added, referring to the company’s smartphone line. “There’s no question there’s a very competitive market and in addition to that, we didn’t need an economic environment that we are facing today with regard to consumer spending. So those are really the issues.”

Palm isn’t alone in facing such challenging market conditions, however.

An IDC report on Thursday revealed that the mobile phone market faces a slowdown in 2009 due to the global economic climate. Total shipments are expected to be 1.9 percent lower than the 7.1 percent
growth the industry experienced in 2008.

The research firm said it’s the first dip in industry growth since 2001, when sales declined 2.3 percent. But on the positive side, IDC does not expect the sluggishness to extend beyond 2009, it said.

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