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Will Elevation save Palm?

When investors look at early stage companies one of the biggest decision criteria underlying their investment decision is the quality of the people.   “Better to bet on a C idea and an A team than an A idea and a C team,” the saying goes.  With great ideas being somewhat plentiful, and the kind of adaptable idea-executing work being a challenge, it’s easy to understand.  Success is about execution.  And that requires a few things including, as Charles Schwab said, Vision  (“A man to carry on a successful business must have imagination. He must see things as in a vision, a dream of the whole thing.”) and as Vince Lombardi said, Teamwork (“Individual commitment to a group effort — that is what makes a team work, a company work, a society work, a civilization work.”)

This past week, struggling hand–held maker Palm announced it was taking a sizable minority investment ($325m) from private equity firm Elevation Partners. The deal raises the question – are good people, and a change of perspective enough to fix a troubled, established company.  I don’t know the answer, turnarounds are tricky beasts, especially in consumer-facing product companies, but it’s a question worth asking.

Palm, which once was strong in providing devices to business users,  has seen its once solid market position deteriorate with competition from new smart phones from Research in Motion and others.  In the 3rd Quarter (March), the company beat analyst expectations but with meager earnings of $11.8m (0.11/share) on revenue of $410.5m; evidence of how low expectations were (earnings were a 61% reduction compared to the same period the year before).   The company has also struggled to find the kind marketing spark and innovation it needs to grow with the changing marketplace.  Inventory issues haven’t helped either.

The Elevation investment will come in the form of convertible preferred stock.  Alongside it, Palm also secured commitments for $400m in new debt and a $40m line of revolving credit.  The money will pay for a dividend distribution, among other things. Additionally, there will be a management change.  Elevation managing directors Roger McNamee and Fred Anderson (Former CFO at Apple) will join the board of directors and Eric Benahmou (former Chairman of 3Com) and Scott Mercer will step down.  Jon Rubenstein, who was instrumental in the development and growth of the iPod at Apple will become executive chairman and be tasked with proving he can replicate his success at Apple in a new environment and a different corporate culture (Apple’s design and development culture is very different from Palm).

Will the new leadership help?  Maybe, but I’m not sure.  I’m a big fan of the people at Elevation. Roger McNamee has a history of being both a maverick and a visionary it ways I admire. His timing, with the help of those he’s worked with, has been impressive in the past. There’s no question the people involved at the top of Elevation have a vision and track record of success but so far, Elevation, despite its rock star (literally and figuratively) leadership has not been terribly active in deploying its funds or proving its abilities.   (Very impressive historical track records, including with Silverlake Partners, notwithstanding).

As a new team, they haven’t showcased their abilities yet and in Palm, they’re taking a measured step (e.g. minority investment) into a highly competitive marketplace with a brand that, while well established, has been faltering. Elevation’s only substantial prior investment was a minority stake in a joint venture with Forbes.  It’s too soon to rate that, and there isn’t anything else to really showcase their operational model to the extent its different from the firms members past experiences at other firms.  Further, John Riccitiello, one of its celebrated founders, left to rejoin Electronic Arts and that has to at least beg the question whether there are changes going on inside the firm relative to its original plans or whether his departure was purely related to personal career interests and a desire to leading a single company.

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