UPDATE: I just got a call from someone close to Elevation Partners who walked me through the numbers. Bottom line: Elevation expects to receive $485 million from the HP deal for the $460 million it invested.

Why? The original $325 million that Elevation invested was guaranteed in the event of an exit. In other words, out of the $1.2 billion that HP is paying, Elevation get made whole for that $325 million. Through in the other warrants and other convertible stock, and Elevations winds up with $485 million.

Worth noting: That also means that common shareholders will be getting much less than the $5.70 per share being touted in press releases.

The common shareholders still get $5.70 per share, a figure calculated after Elevation’s payout is backed out.

See this post from the Wall Street Journal and this one from Barron’s for more details on how the preferred shares are structured.

MY ORIGINAL POST:

At first glance, it’s hard to say for sure whether Elevation Partners will take a hit or just about break even on its Palm investment. On Wednesday, Hewlett-Packard said it was buying Palm for $1.2 billion, or $5.70 per share.

Elevation is Silicon Valley’s big buy-out firm whose investors include Bono of U2 fame and noted venture capitalist Roger McNamee. For a good overview of Elevation, check out this TechCrunch post from a few weeks ago. Palm was one of its biggest bets.

Here’s my math on the deal: Elevation Partners originally bought a 25 percent stake in Palm back in 2007 for $325 million as the smart phone maker sought to reboot. The investment firm then pumped another $100 million into Palm in 2009. I calculate a total of $425 million invested, though it may be closer to $460 million for reasons I’ll explain below.

I’m still trying to work out the math, but according to the most recent proxy filing last year, Elevation holds 65.66 million shares of Palm, giving it 33.1 percent of the company.

At one-third of the $1.2 billion, Elevation’s take would be about $400 million, though it’s probably less after banking fees. However, calculating the pay off by the $5.70 per share offer by the 65.66 million shares, it gives Elevation only $374.3 million.

Here’s why it’s complicated. According to Palm’s 10-Q filed in April:

“In March 2009, Palm exercised its right to have Elevation sell 49% of the shares underlying its Series C Units investment, along with newly issued shares, to other investors in a $159.6 million underwritten public offering, for which Palm paid Elevation $49.0 million and from which Palm received the net cash proceeds of approximately $103.5 million. Elevation purchased a total of 8.2 million shares in that offering for an aggregate purchase price of $49.0 million, at the public offering price of $6.00 per share. Elevation purchased an additional 2.2 million shares and Mr. McNamee purchased 0.1 million shares in Palm’s underwritten public offering in September 2009 for an aggregate purchase price of $35.0 million and $2.0 million, respectively, at the public offering price of $16.25 per share.”

So it looks like Elevation essentially swapped some early shares for 8.2 million at $6 per share (which would lose money) and a couple million more at $16.25 per share (which would lose even more money). Ouch. That’s not good news for either Elevation or the investors who bought shares in that secondary offering at $16.25 per share. Adding in McNamee’s shares to the original $425 million gives us a total of $460 million sunk into Palm.

The Financial Times says today it thinks Elevation probably broke even:

“The sale marks an admission of defeat by Elevation Partners, the Silicon Valley buy-out firm that put $400m into Palm and overhauled its management and technology in an attempt to turn it into a rival to Apple. Based on the terms of the preferred stock it bought in Palm, Elevation’s break-even point from a sale would have been around $4.80, leaving it with a small profit from its foray.”

TechCrunch writer Sarah Lacy, whose post I link to above, put Elevation’s investment at $460 million (which I think is right) and wrote: “even with Palm at the lowly $4 a share, Elevation roughly breaks even on the fund.” Though she may be referring to the overall performance of the investment fund, rather than just the Palm investment.

Is my math off here? Does anyone else have insight into how Elevation did on this deal?

UPDATE: My colleague Troy Wolverton notes that in the latest 10-Q that Elevations stake is now only 30 percent:

“On an as-converted and an as-exercised basis, the Series B Preferred Stock, Series C Preferred Stock, common stock and warrants currently owned by Elevation represents 30% of Palm’s voting shares as of February 28, 2010. As of February 28, 2010, Elevation was entitled to designate two members to Palm’s board of directors”

At 30 percent, Elevation’s slice of the deal would be closer to $360 million, which is more in line with the $374 million figure I calculated above. That would come to about a $100 million loss, which if true, means Elevation will have its work cut out just getting the overall fund back to break even.