Palm Gets $100 Million from Elevation Partners

The Treo maker's largest investor signals confidence in the company's turnaround plans with a big injection of capital

By Arik Hesseldahl

If ever there were a technology company known for performing when its back is up against the wall, it's Palm (PALM).

In its 16-year history, the company that made handheld computing commercially viable first with its PalmPilot devices, then later with its Treo line of smartphones, has seen its identity and even its name shift several times. And often those changes have come at times when circumstances were darkest, usually turning things around for the better.

There was the time in 2003 when Palm and Handspring, a cousin company started by three original Palm founders, decided they belonged together after competing for three years. The merger resulted in the Treo, originally conceived at Handspring, which was strapped for cash. Another time, in 1999, Palm, then a unit of 3COM (COMS), was dismissed as a one-hit wonder as sales of the original PalmPilot slowed. Then came the sleek Palm V, and sales rocketed once again.

Perhaps now is one of those times as well. On Dec. 22 the company announced it had secured a $100 million capital infusion from its largest single investor, Elevation Partners. The investment comes on top of a prior investment from the firm in 2007, of $325 million for a 25% equity stake in Palm.

Expectations for New Operating System

Looking back, it doesn't seem to have been a very smart move. Elevation valued Palm at 17.50 a share. The latest investment values the company at 3.25 a share, and the stock closed on Dec. 23 at 3.50. (At least $9 of the drop can be attributed to a repricing of the stock in late 2007 as part of the closing of Elevation's first investment.)

The move comes at one of the moments in Palm's history when the clouds are indeed rather dark, but when there appears to be, once again, the prospect of a turnaround. This latest investment looks like a bet by Elevation and its head, Roger McNamee, that just such a reversal is at hand.

And it may be. Palm has announced plans for a press event on Jan. 8 at the International Consumer Electronics Show in Las Vegas, and has been rather cagey about what will be announced. The company is expected to show the latest version of its long-anticipated new operating system, code-named Nova, and perhaps to show a new device running it.

McNamee is as convinced as ever that Elevation's investment in Palm will prove fruitful in the end. "When we invested in Palm, it was pointed in the wrong direction," he says. "It was our view that a big phase shift was beginning in mobile devices that would disrupt the cell-phone industry. When we invested, smartphones were about 3% of a billion units; now they're 6% to 7% of 1.2 billion units. Within 10 years, we expect smartphones to be half of all cell shipments." Just getting a small piece of that, he argues, will be very profitable indeed.

Palm's Future Lies with Apple Veteran

Hopeful? Perhaps, but at least he's putting his money—or at least that of his investors—where his mouth is. A cynic might argue he's throwing good money after bad, and at first glance it would be hard to disagree. Sales at Palm for the first six months of its 2009 fiscal year, as of Nov. 28, were $558.5 million, down more than 21% year-on-year. In its most recent quarter, sales of its Treo smartphones were down to 599,000 units, a drop of 13%. Meanwhile, Palm's cash reserve had dropped to $144 million, plus $80 million in short-term investments. Not counting restructuring charges, that works out to about two quarters' worth of operating capital.

Palm's slowdown comes as smartphone sales have been buzzing. Research firm Gartner (IT) pegged global sales in the third calendar quarter at 36.5 million units, up from 32.7 million a year ago, a surge of more than 11%. Who accounted for most of the growth? Research In Motion (RIMM), the Canadian company behind the BlackBerry, saw its shipments grow 81%, Gartner says, while Apple (AAPL) saw sales of its iPhone grow an astonishing 327% in the same period.