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Investor Elevation Partners backs Palm, despite woes

* Elevation sees great opportunity for Palm

* says Palm management working through challenges

* Palm shares fall 29 pct to 14-month low on weak outlook

NEW YORK, March 19 (Reuters) - Palm Inc's PALM.O most influential investor, Elevation Partners, stood by the smartphone maker on Friday, even as other shareholders bailed and analysts warned its days as an independent company may be numbered.

Palm shares tumbled 29 percent on Friday to a 14-month low as investors questioned its ability to compete in a tough smartphone market against Apple Inc AAPL.O, Google Inc GOOG.O and Research in Motion RIM.TO. [ID:nN19134642]

The sell-off was sparked by Palm’s warning that its current-quarter revenue would be far below Wall Street’s expectations [ID:n18254531] -- the company’s latest misstep after posting net losses for two fiscal years. [ID:n18254531]

But Elevation, which bought a 25 percent stake in Palm for $325 mln in 2007, said the smartphone maker still has “enormous opportunity” and backed its management led by Chief Executive and Chairman Jon Rubinstein, a former member of Elevation who is also famous for developing Apple’s iPod.

“Jon and his team have built the best mobile operating system available today and they are now working through short-term execution challenges with Elevation’s complete support,” Elevation said through a spokesman.

Elevation, a private equity firm that includes U2 lead singer Bono among its partners, has made three more investments in Palm since its initial deal, buying common stock, convertible preferred shares and warrants.

Elevation, which now controls roughly 30 percent of Palm, has also named former Apple executives Fred Anderson and Roger McNamee to Palm’s 7-member board.

While Palm’s share price has plunged 72 percent since the first deal in June 2007, the value of Elevation’s investment has been maintained by the terms of the original deals.

Palm’s filings show that Elevation has invested a total of $460 million in the company, an investment that is worth $432 million today based on Friday’s close of $4.00.

QUESTIONS ABOUT ITS FUTURE

Few Wall Street analysts share Elevation's optimism on Palm, whose relatively small size means it does not have the same leverage with retailers or phone carriers as an Apple or Nokia NOK1V.HE or Motorola Inc MOT.N.

Kaufman Bros analyst Shaw Wu cut his rating on the shares to “sell” from “hold.”

“While we believe Palm has some value with its webOS (phone operating software platform) ... we are unsure of the company’s prospects as an ongoing concern,” he said in a client note.

Morgan Joseph analyst Ilya Grozovsky estimated the company may only have enough cash to operate through the middle of 2011, given its expenses and persistent losses.

Canaccord Adams analyst Peter Misek said Palm’s troubles will likely accelerate as its partners question the company’s solvency and withdraw their support.

Palm has for years been seen as a takeover target, with Microsoft Corp MSFT.O, Nokia NOK1V.HE and Dell Inc DELL.O often mentioned as potential suitors which may be attracted to webOS, Palm's mobile phone operating system software.

“The problem is they have shareholders too, and they would be looking at how they can make (a deal) profitable,” said C.L. King and Associates analyst Lawrence Harris. “Palm has not been able to get traction in the U.S. market with their two largest customers, so where is the value with webOS? It is neat software which has not proven to be compelling.”

On Thursday’s conference call Palm’s Rubinstein responded to a question about a potential acquisition by saying: “We are a public company. And if there’s a reasonable proposal, of course the Board has to consider it.”

“But, that being said, our focus since the day I arrived here, and that’s almost three years ago now, is to build a great Company with a great mobile platform and great products. And that has been our focus.”

He added that the company is working to address its problems. It has upgraded the software to improve speed and battery life, boosted its advertising, and is working to train retailers to better show customers why they should buy Palm phones over its rivals.

Rubinstein also mentioned that the company would introduce a new product this year, but provided no specifics.

Editing by Richard Chang

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