Going to the chapel, and we’re gonna get pur-ur-ur-chased…

Welcome to Round Table, which is in fact not a table at all. Round Table is a continuing series on PreCentral where we pose a question to the staff and they provide their thoughts and insights. The question could be something simple like “what’s your favorite webOS app?” or something a bit more complicated, like “why did Palm choose the creepy lady?” Or maybe we’ll just end up chatting about our favorite episode of Alf, you never know. Today, however, we’re going to take a crack at the big news of the week: HP is buying Palm, and what does that mean?

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While we won’t expect Elevation Partners to say anything about it until the sale is complete, it looks like they’re about to walk away from Palm with a small profit. This flies in the face of sensationalist claims of partner Bono (yes, of U2 fame) being “the world’s worst investor,” though we imagine he, Roger McNamee, and the rest of Elevation Partners had hoped to make a bit more off the deal. Just how much is Elevation set to get when all is said and done? $485 million, according to Venture Beat.

That amounts to 40% of the $1.2 billion that HP is set to lay down to snap up Palm. The story of how Elevation’s getting more than their 30% share of Palm is an interesting one. Elevation’s initial investment in Palm in 2007 was to the tune of $325 million, which wrapped up 25% of the smartphone maker under Elevation’s control. Elevation has twice in the intervening years invested in Palm stock, upping their total investment to $460 million.

So luckily for Elevation Partners and all their investors, they didn’t lose money on this deal. Of course, if they’d sold their shares late last year when Palm stock was trading over $18, they could have brought in close to $1.5 billion. Yes, you’re reading that right, a third of Palm used to be worth more than what HP is paying today. That’s what happens when expectations are tempered by reality.

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Palm announced today that hedge fund Harbinger Capital has purchased a 9.48% “passive stake” in the company. The purchase of 16 million shares, completed on April 12, equates to an investment of approximately $83 million at Monday’s stock price. The passive stake is one with no voting powers, otherwise this large of a share would have given Harbinger significant influence over the executive board of Palm. It is worth noting that this stock purchase is of common stock (the kind traded on the New York Stock Exchange) and does not represent an additional cash infusion for Palm.

Harbinger Capital Partners specializes in what they call “event/disaster strategies.” Their investment strategy revolves around putting money into companies they view as perched to experience significant growth and in companies that have fallen on hard financial times. Either (and both) could be used to describe their investment in Palm. Harbinger is headed by Philip Falcone, a billionaire who made his fortune from hedge fund management. The firm has made significant investments in the technology sector, and is actively engaged in the purchase and development of 4G wireless technologies. Last month Harbinger purchased satellite communications firm SkyTerra for nearly $262 million, and plans to spend as much as $4 billion building LTE network infrastructure to lease to American cellular carriers. As such, the 16 million share purchase of Palm stock is a drop in the bucket compared to how much Harbinger throws around on a daily basis.

What this means for Palm is nearly as complicated as what Elevation Partners’ investments in the company meant (Elevation Partners currently owns 30% of Palm). While Harbinger does not hold a voting stake in Palm, they can still exert significant influence on how the company is operated. It is worth noting that there are two other areas in which Harbinger invests: corporate shorts and value investments, both of which are passive investments, and have polar opposite opinions of the investment. Corporate shorting revolves around the borrowing and sale of shares that are believe to be overvalued, followed by the purchase and return to the lender of the shares at lower cost. Value investment is the more positive of the two, “where Harbinger believes a positive catalyst for value realization is already present” and the stock is poised to ride higher.

Given recent developments, we see the last option as the most likely. Even if it’s just Harbinger riding Palm shares into the takeover sunset and reaping a healthy profit, they see the stock value on the rise and want to take advantage of it. As speculated by StreetInsider.com, Harbinger also has the option to convert their passive stake into a vocal one should they not like what they see, and with the billions of dollars they have to play with, Harbinger could even make a bid for Palm themselves and take the company private.

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There are two things that Palm owns that are of true value: webOS and a giant bucket full of patents. Either would be good reason for a larger competitor to purchase Palm, and according to some analysts, either is good reason to declare Palm to be undervalued (Palm stock plus Elevation Partner’s 1/3 share equals approximately one billion dollars).

That Montana-sized basket full of patents is good for several things. Especially when that basket of patents contain things like "Integrated Handheld Computing and Telephony System and Services," i.e. smartphone. For one, Palm can claim royalties when other companies use that patent. It also, at least to this point, has served as a barrier against most serious patent infringement cases (Hello, Cupertino). Having a lot of patents is also good for something else: when those patents are licensed by many companies, it gives the holder significant value. Palm’s veritable trove of patents has lead PatentVest CEO Anthony Mazzarella to declare to Investors Business Daily that, “Based on our metrics, the value of Palm’s intellectual property is along the same order of magnitude as Apple. The market is overlooking the IP value in Palm, which has great value.”

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Palm’s stocks may have fallen, but that doesn’t appear to have shaken Elevation Partners. On the contrary, they’re hold strong and standing with Palm in the belief that Palm’s webOS is the future of mobile computing.

Elevation Partners have a long history of investing with Palm. They currently control roughly 30% of the company and have invested a total $460 million invested in Palm. An Elevation Partners spokesman told Reuters,

"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."

The statement might not be overly surprising, but it is definitely a welcome note of support. The statement’s wording of "short-term execution challenges" might seem optimistic, but recall that Elevation and Palm believe that webOS is a ten year strategy.

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“Palm is essentially an accelerating death spiral.”

That’s not a good thing to hear, and given yesterday’s bleak financial report, we can’t say we disagree (though we do maintain that it is possible to pull out of a death spiral). That little nugget comes from Ilya Grozovsky, analyst at Morgan Joseph & Co. As CNN Money noted, Grozovsky was one of two analysts to cut their price targets on Palm stock to a heart-stopping $0/share. By valuing the stock at zero, Grozovsky and Peter Misek of Canaccord Adams are declaring that Palm the company is worth nothing.

Those two doomsayers aren’t the only ones kicking Palm to the curb. At this point, not a single analyst will recommend buying Palm stock. Given Palm’s current cash burn rate, most estimate that Palm has only about twelve months to execute a turnaround or find a suitor with deep pockets.

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If there’s a lesson to be learned here, it’s don’t mess with the investors. They are sharks, and if they smell blood in the water, look out. Today that’s a lesson Palm learned, revising down their previously upbeat forecasts for the current quarter. The move, along with ongoing worries about Palm’s performance in the marketplace, sent Palm’s shares nose-diving through the floor of the NASDAQ exchange, to the tune of a 19.28% loss, closing the day at $6.53 a share.

That loss was the biggest one-day percentage loss since October 2006 when the investment by Elevation Partners resulted in an $8 dividend for stockowners. Today’s loss also sent Palm stock to a point not seen since January of last year, just before the Pre was announced at CES 2009. From a peak of $18.09 in October, Palm stock has lost nearly two-thirds of its value, wiping out $2.9 billion of shareholder value. As of today’s closing, the total outstanding Palm stock plus Elevation Partner’s 1/3 stake (purchase price, ~$7/share) comes to just $1.6 billion. In the past week alone, Palm stock has declined more than 30%.

All of this tells us one thing: Palm’s in trouble. They had enough trouble gaining the faith of customers and a handful of stock analysts, and while webOS 1.4 will make plenty of current users happy, we don’t think it’s going to do much to assuage shareholders, analysts, or potential new customers. Sorry for all the doom and gloom lately folks – sometimes that’s just the news.

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While the ranks of Palm are filling with more and more former Apple folk, with CEO Jon Rubinstein at the top, investment firm Elevation Partners is also busy picking up Apple people. While Elevation Partners isn’t in direct control of Palm, they do own 1/3 of the company and have invested a few hundred million dollars into Palm. Adding to Elevation’s board is former Apple chief software engineer Avie Tevanian. While at Apple, Tevanian was the head of Mac OS X development. Despite his pedigree, we aren’t expecting too much from Tevanian as far as Palm is concerned, as when he comes to Elevation he’ll be a managing director in charge of seeking out new investment opportunities for the firm.

[via: CNET]

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Investment firm Elevation Partners has invested some $460 million into this little company called Palm. Today, that investment has gained around 54% for the firm, and at one time had nearly tripled in value (though has since dropped considerably). So with a gain of around $250 million on the table, now would seem like a good time to take some profits, eh?

Not so, Elevation co-founder Fred Anderson said to Bloomberg, “We haven’t taken money off the table because we see a huge market opportunity here. This is a marathon.”

Given the number of changes that Elevation’s partners have instituted in Palm, from installing Jon Rubinstein as Chairman (and he guided us to the bright land of webOS) to eventually moving him in place as CEO once Ed Colligan retired. Anderson himself even serves on Palm’s board. But what future does Elevation Partners see in Palm? It’s not a takeover, as that potential does not factor into their business model (though it does factor into Palm’s stock price, and thus the value of Elevation’s investment).

What Elevation Partners sees in Palm is expansion, and we expect to see plenty of that later today at CES. At the very least, Palm will announce their partnership with Verizon, and they may even talk some about AT&T and some international carriers. Most of us here will agree that the Pre and Pixi are excellent devices, but whether or not Sprint is excellent service is another question entirely. Expanding Palm’s distribution channels, and eventually the product line, will be the key to growing Elevation Partner’s investment. And that truly is a long-term strategy.

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If it weren’t for guys named Bono and McNamee, we wouldn’t even have Palm or webOS today. The guys at Elevation Partners have invested $460 million into Palm, and that investment would net them only $40 million were they to sell today. A 9% gain isn’t the kind of thing that attracts new investors, and the folks at Fortune believe that Elevation is on the prowl for more money – no company wants to sustain, they want to grow, even investment firms.

With 70% of Elevation’s initial fund already invested and little demonstrable success to show for it, they’ll have their work cut out for them should they seek more money. Then again, they’ve got Bono and Roger McNamee. Those two, along with the rest of Elevation Partners’ board, are clearly in Palm for the long term. Like we said, selling today would net $40 million in profit, but just two and half months ago they could have turned that investment into $330 million in profit. That 75% gain would have been more to investors’ liking, especially given that Palm is expected to continue burning through cash at a steady clip as they expand Pre and Pixi distribution onto new carriers in 2010.

[via: Palm InfoCenter]

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