Palm got a new lease on life this week, up against new rivals in the form of Apple’s iPhone and a revitalized Research in Motion, Palm has taken on private equity funding and added the cachet of one of the chief architects of the Apple iPod. The move looks like a step by financiers to grab the Palm brand and turn it into an Apple iPhone rival, and snatch some of the kudos associated with new handset user interfaces.
The deal is with private-equity firm Elevation Partners, which is understood to be the investment arm of U2 band frontman Bono, which will plough in a mere $325 million into Palm, but at the same time borrow $400 million in order to sweeten the deal with a $9 a share cash distribution.
The Apple name is retired iPod engineer, Jon Rubinstein, former senior vice president of hardware engineering and head of the iPod division at Apple, who will take over as executive chairman.
Elevation directors Fred Anderson, who was once CFO of Apple, and Roger McNamee, a co-founder of Silver Lake Partners, will join the board and replace various board members including Eric Benhamou of 3Com fame, which once owned Palm.
Rubinstein’s lineage is what’s driving this deal though. He joined Apple as senior vice president of hardware engineering in 1997 and has been part of Apple’s turnaround, overhauling engineering teams, product roadmaps and manufacturing processes, and making Apple the nimble CE manufacturer it is today.
Rubinstein’s CV says that he is credited with conceiving the iPod, but given what we know about Apple, this was likely a consensus design that went right to the top of the company.
Palm’s chief executive, Ed Colligan said “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.’
Until now it was widely believed that Palm was up for sale, a purchase that has been sniffed at by Nokia and Motorola by all accounts, with no takers. The company has long been concerned about exactly what underlying operating system to use and has flirted with its own Palm OS now sold on, with Windows Mobile and more recently with Linux, and has products that use all three.
Rubinstein said of the deal, “I am thrilled by the prospect of helping Palm deliver innovative products capable of transforming the mobile-device market. Approximately 1 billion cell phones are sold each year, and mobile computing is a category with enormous potential. This is a company with an impressive history of introducing game-changing products, and I intend to help extend that legacy.”
Under the terms of the recapitalization plan, Elevation will purchase $325 million of a new series of convertible preferred stock. The conversion price will be $8.50 per share, which represents a premium of approximately 16 percent to the implied post-distribution price over the 10 trading days ended June 1, 2007, excluding the $9 per share cash distribution. Upon completion of the transaction, Elevation will own around 25% of Palm’s stock.
Palm says it will use the proceeds from the $400 million of new debt to fund a cash distribution, but the total proceeds to be distributed to shareholders is around $940 million, so it will also use up a lot of existing cash. This looks to us like it is being done to buy the goodwill of the shareholders so that they don’t block the deal.
The distribution represents more than 50% of Palm’s current market capitalization and the company expects to have over $300 million of cash after the distribution.
The deal will close in the third quarter but this is a definitive purchase agreement and the board of Palm has already unanimously approved the deal.