Palm sells stake; hopes to capture some iPod magic

Palm said Monday it will sell a 25 percent stake to private equity firm Elevation Partners. As part of the transaction former Apple executives Jon Rubinstein and Fred Anderson will join Palm's board.

The transaction (Techmeme discussion) recapitalizes Palm in a way that would have occurred if it had gone private. Palm shareholders will receive $9 a share in a cash distribution. Elevation will invest $325 million in Palm, which will also take on $400 million in debt to fund the $9 in cash. The total value of the deal is about $940 million. Palm had been looking for a buyer and apparently couldn't find an entity to take the whole company on better terms.

When the transaction closes, Palm will add Rubinstein, one of the architects behind the iPod, and Anderson, Apple's former CFO, to the board. Roger McNamee, managing director of Elevation, will also join Palm's board. Rubinstein will be executive chairman of the Palm board. Eric Benhamou and D. Scott Mercer will resign from Palm's board.

Once the dealing is done, Palm reckons that it will be able to attract more talent. In a statement, Palm CEO Ed Colligan said:

"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. Jon Rubinstein is one of the top engineering executives in Silicon Valley, and he will lead our product-development efforts. As a significant new investor, Elevation brings onboard unique partners and relationships, plus a long investment horizon."

That long investment horizon will be needed because this move doesn't give Palm any quick fixes. Palm's biggest problem: It needs the heft to design game-changing products. And that new Foleo contraption isn't going to cut it. If the best Palm can come up with is a stripped down laptop that's tethered to a Treo we've got problems.

Rubinstein, who was most recently the senior vice president and general manager of Apple's iPod division, may be able to change that equation a bit. He noted in a statement that Palm pioneered the smartphone and that he "intends to extend that legacy." If he can bring some iPod design mojo Palm may have something going.

There are three questions though:

• Does iPod lightning strike twice?
• Can Rubinstein simplify the smartphone, which tries to pack in way too many features today.
• Can Palm capture any of that Apple-Steve Jobs design secret sauce and product excitement?

Before any of those answers surface, Rubinstein will have to recruit some Apple-ish product designers. Palm's products have gotten stale and it just doesn't have the scale to compete with the devices coming from much larger players such as Nokia and Samsung. Meanwhile, Apple's iPhone may be a threat starting June 29. Rest assured that AT&T will be pushing iPhones over the Treo.

All that said though, Palm has a lot of raw material lying around. Rubinstein and Elevation may be able to take those assets further than Palm has so far. The one worry: Palm's management is still in tact. Can some seats on the board really change that much?