NEW YORK (Reuters) - Treo smartphone maker Palm Inc. PALM.O said on Monday it will sell a 25 percent stake to private equity firm Elevation Partners for $325 million in a deal that brings in a former senior Apple Inc. (AAPL.O) executive as chairman.
Palm shares climbed more than 8 percent as investors hoped the cash infusion and the appointment of Jon Rubinstein, formerly senior vice president and general manager of Apple’s iPod unit, as executive chairman, will revive the Palm brand and perhaps develop a relationship with Apple.
Rubinstein’s “role will be in strengthening and fine-tuning our products’ engine,” Palm Chief Executive Ed Colligan said on a conference call. “This is about allowing us to put a team in place to enable us to capture a leadership position.”
The deal comes as Palm, which popularized the personal digital assistant, or PDA, in 1996, tries to regain its status as a top device maker amid stiff competition from the likes of much bigger phone rivals, such as Motorola Inc. MOT.N and Nokia Oyj. NOK1V.HE(NOK.N)
Most analysts viewed the news with guarded optimism, noting that any devices borne of Palm’s changes would not surface for more than a year, during which the strength of Palm’s rivals will build.
“The smartphone market is becoming increasingly crowded, with offerings such as Apple Inc.’s (AAPL.O) new iPhone, Research In Motion’s RIM.TO BlackBerry Curve ... and Motorola’s second generation Q device,” said Oppenheimer analyst Lawrence Harris.
He said Palm is likely to be significantly affected by the hotly anticipated iPhone, due to be launched on June 29, since they share a target audience that includes college students, as well as small- and medium-sized businesses.
The Elevation Partners deal comes one week after Palm introduced a portable computer, Foleo, to lukewarm reviews.
Palm has long been viewed as an acquisition target, thanks to its well-known brand, operating system and relationship with mobile-phone carriers. Analysts said Monday’s deal should put an end to that speculation.
“While Palm has numerous near-term challenges, we are upgrading Palm shares ... in view of Palm’s announcement that a private equity involvement by former Apple executives, as well as a valuation of around $17.50 (a share) for the Elevation Partners stake,” Bear Stearns analyst Andy Neff said in a note.
Neff raised his rating to “peer perform” from “underperform,” adding that he expects alliance talks between Palm and Apple to emerge.
Elevation co-founders Fred Anderson, Apple’s former chief financial officer, and Roger McNamee will join Palm’s board, replacing Palm Chairman Eric Benhamou and director D. Scott Mercer, who will both resign once the deal closes.
The board will increase to nine from eight, including Rubinstein, who left Apple in 2006.
Palm plans to pay $9 per share in cash to stockholders, and will use the new proceeds along with existing cash and $400 million in new debt to finance the cash payout.
Palm stock rose $1.35 to $17.44 on Nasdaq. The rise recoups some of the value Palm lost after a rumored deal to sell the company failed to materialize in late March. At the time, phone makers Nokia and Motorola were seen as possible suitors.
Elevation’s founders include veteran venture capitalists from Silver Lake and Blackstone Group, and Bono, the lead singer of rock group U2. The Menlo Park, California-based firm raised a $1.9 billion private equity funds in 2005 that focuses on media and entertainment.
Elevation said this is its largest investment to date. One of the firm’s founders, Roger McNamee, said the company does not intend to take a larger stake in Palm.
Anderson, the formerly Apple CFO, reached a settlement with the U.S. Securities and Exchange Commission in April over backdated stock options at the company.
Anderson had said he relied on Apple CEO Steve Jobs in handling 2001 stock option grants that became the subject of an investigation and civil lawsuit.