Palm shares sink on worries about capital

SAN FRANCISCO Wed Nov 5, 2008 2:37pm EST

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SAN FRANCISCO (Reuters) - Shares of Palm Inc tumbled on Wednesday after an analyst downgraded the stock and questioned whether the smartphone maker will need to raise additional capital to pull off its turnaround plan.

The shares were down 21 percent at $3.16 in afternoon trade on Nasdaq.

Morgan Keegan analyst Tavis McCourt said in a note that he expects Palm's cash balance to fall to $75 million next year as it launches its new platform. Its cash balance was $248 million at the end of August.

"We are increasingly concerned that Palm has little room for additional missteps prior to its new platform launch next year without needing to raise additional capital," McCourt said, noting that Palm filed a shelf registration on Monday that would allow it to issue debt, stock or other securities to raise funds.

"Although needing additional capital (if it comes to that) is not the end of the world for Palm, given its deep-pocketed backers at Elevation Partners, it is impossible to determine ultimately how dilutive such a capital infusion may be to common shareholders," McCourt said.

Private equity firm Elevation Partners bought a 25 percent stake in Palm last fall for $325 million.

McCourt said Palm, maker of the Centro and Treo smartphones, is on track to release its new hardware and operating system in mid-2009. He expects the launch to ultimately return the Sunnyvale, California-based company to profitability.

Shares of Palm are down roughly 50 percent this year.

(Reporting by Gabriel Madway; editing by John Wallace)

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