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Elevation Partners Backs Palm with Another $100m

palm metueIn June of 2007, private equity firm Elevation Partners announced they were committing $325 million and several experts, including iPod guru Jon Rubinstein, to turn Palm’s floundering ship around.  Palm’s CEO Ed Colligan predicted it would take about 18 months to chart the course.  Time’s about up.  It’s now been a year and half.  18 months, and many bad earnings cycles (including consecutive losses), have passed and the company’s inching up on the release of a new smartphone platform (dubbed “Nova”). With losses mounting, it’s an all or nothing gamble. A big move to redefine the brand and reclaim prominence.  Some question whether, in a down market, it will be enough even if Palm scores perfect. Some of the same wonder if it is too little too late to save the brand and restore the company. Palm’s biggest private investors aren’t among them.  Today, Elevation Partners committed another $100m.

Elevation’s one hundred million will buy them voting rights equal to about 11%.  Combined with their prior purchase, it will give the private equity firm 38% of Palm’s outstanding vote (on a converted basis). 

Under the terms of the new agreement (revealed in an SEC filing here), the purchase will take the form of 100,000 units of newly minted Series C Preferred Stock.  Each share will be convertible to common stock at a conversion price of $3.25 and also include warrants for the purchase of 70 addition shares of common stock at the same price.   

Between January 31st, when the deal is expected to close, and March 31st, under certain conditions which are not publicly specified, Palm will have the right to force Elevation to sell up to 49% of the new purchase.  Such a sale would happen at the same price, or greater, and Palm would receive any profits from any sale above the exercise price.

Last week, Palm reported dismal second quarter earnings. Smartphone sell-through for the quarter was down 13 percent year over year to 599,000 units. Smartphone revenue was down 39 percent to $171.0 million.    Adjusted EBITDA (Earnings before interest, taxes, depreciation and amortization) for Q2 totaled a loss of $55.8 million.

Cash on hand at the beginning of the quarter was $167.3m and case at the close was $143.6m as of November 30th.   

Based on the financials, Elevation’s money is not so much a lifeline as it is a safety net. It’s also a statement of Elevation’s continued commitment to the company and its strategic plan moving ahead. 

In the earnings announcement, CEO Colligan looked toward that future.  He acknowledged, “We’re working through an undeniably difficult period but," he added, "near-term challenges shouldn’t overshadow the fact that we are on track to deliver a breakthrough new platform and products that will bring a truly differentiated smartphone experience to our customers and reestablish Palm as a leading innovator in the mobile industry.”

Undeniable, the bar is raised high and Palm is in need of a victory.

To the company’s credit, they do have a solid, established customer base and a known brand that people remain passionate about.  Jon Rubinstein is also the kind of guy that has a track record people like to bet on. 

Will Palm pull it off?….opinions run the gamut.

From my vantage point, with Palm and Elevation, the jury’s been out from the start and still is.  When Elevation first stepped into Palm’s life, the Metue article read:

"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… turnarounds are tricky beasts, especially in consumer-facing product companies, but it’s a question worth asking.

… 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 it’s different from the firms members past experiences at other firms.”

A year and a half later, and I’m still asking the same question. 

Fueled by former Mac PR staffer Lynn Fox and others educated on Apple’s Cupertino campus, Palm’s keeping their plans tightly under wraps.  Letters have gone out for a January 8th event at the Consumer Electronics Show, but details are sparse.  There’s the iPhone, the G-Phone, Blackberries and more to compete with. Palm’s going to need to generate enough buzz to get both carrier partners and consumers excited.  Palm’s future’s riding on it…and so is Elevation’s investment. It’s no small task.

Hopefully soon, we’ll get some answers.

Note on Elevation’s Initial Investment Terms: Elevation’s initial investment was in the form of Series B Preferred Stock. These shares are convertible into common at a conversion price of $8.50 a share.   After the the third anniversary, or October 24, 2010, Palm can force the conversion of these shares into Palm’s common stock if the prior 30 days average closing price is at least 180% of the $8.50 conversion price.   If the shares are still outstanding by 2014, The Series B Preferred Stock has a mandatory redemption to common effective October 24, 2014.  As of the time of the initial investment, the Series B Preferred Stock provided a voting stake of approximately 27%.

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