Elevation & Palm, Good Money Chases Bad (PALM, AAPL, RIMM)

December 22, 2008 by Douglas A. McIntyre

Broken_money_merger_imagePalm, Inc. (NASDAQ: PALM) has managed to secure an additional investment from Elevation Partners for $100 million. It is easy to understand why Palm would want the investment, but we’d note that this is a doubling down from Elevation where good money is chasing bad money now that it already owns such a large interest of Palm.

Elevation will increase its investment in Palm by acquiring newlyissued Series C preferred stock that is convertible into Palm commonstock at a price of $3.25 per share.  This represents a 31% premium toFriday’s close. The Series C preferred stock carries a 0% dividendrate. Elevation will also receive warrants to acquire 7 million sharesof Palm common stock at the same price. Prior to March 31, Palm may elect to cause Elevation to sell upto $49 million of this new investment to other investors on the same orbetter terms than on which Elevation invested.

This capital will allow Palm to push new product introductionsscheduled for 2009 and will give it more stability in troubled times. 

There has only been some hype behind the new operating system becauseApple’s (NASDAQ: AAPL) iPhone has taken so much attention that even theResearch in Motion Ltd. (NASDAQ: RIMM) momentum has been hurt  Combine that with an economy where users are holdingtheir older phones longer, and you have the double whammy.Palm’s cheaply-priced Centro did manage to score many new smartphoneusers at the start, but the economy and competition caught up.

We just noted this company over the weekend in our "10 Stocks Under $10" newsletter with much of the same questions.  There have been many rumors (and hopes) that Dell or even Microsoft might want to acquire the company.  The problem is that this may be viewed with more criticism than any praise. Had the company not cleaned out its cash with the huge dividend, this would not have been necessary. And the problems do not end there.

With or without the $100 million additional investment, 2009 is goingto be a key year for Palm.  Its destiny as an independent andeven as a viable entity are both still in question.

Palm’s stock is up 9% at $2.73 right at the open.

Jon C. Ogg
December 22, 2008