Elevation Partners makes big investment in Palm

In the heady circles of the global private equity industry, where multibillion-dollar deals have become commonplace, Elevation Partners was regarded as the Silicon Valley upstart with the rock star Bono as a co-founder and managing director.

Now Elevation has a chance to prove it’s got more than flash and cash. In its offer to take a large stake in Palm, Elevation has assumed the challenge of trying to guide one of the valley’s storied-but-struggling companies to a better future – with a flashy stake in the fast-evolving smart phone field.

“It’s our biggest investment to date. By quite a lot,” said Roger McNamee, the well-known valley financier who founded Elevation with Bono and former Apple executive Fred Anderson. As he talked, McNamee said he was using Palm’s latest smart phone – a red Treo 755p.

By industry standards, Elevation’s investment in Palm is a small deal, dwarfed by the likes of Blackstone Group’s $39 billion deal for Equity Office Properties or the $18 billion leveraged buyout of Austin’s Freescale Semiconductor by a group of private investors headed by Blackstone.

But it’s a huge deal for Palm, a company trying to reclaim some of its old magic.

It’s also a big deal for Elevation, a firm that was conceived in conversations between McNamee and Bono in late 2003. They raised $1.9 billion in capital before crafting its first deal in November 2005 – a partnership between video makers BioWave and Pandemic Studios.

The reported investment of $325 million into Palm, confirmed Monday, “was not exactly stated,” McNamee said. But the new deal is “obviously much bigger” than Elevation’s previous top investment – a reported $240 million for a minority stake in the business publisher Forbes. Palm investors would receive a $9 per share dividend under the transaction, which is subject to shareholder approval.

Menlo Park-based Silver Lake Partners, which McNamee helped establish in the late 1990s, is perhaps the best known of the valley’s homegrown private equity operations – and one of the first to specialize in technology, said Josh Lerner, a professor at Harvard Business School who studies private equity. Others Bay Area private equity firms include Francisco Partners, Golden Gate and Symphony Capital. Global private equity powers like KKR and Texas Pacific Group have also shown increasing interest in valley tech companies.

While its managers have impressive resumes, Elevation itself has yet to exit any of its investments. Not unlike a contractor who specializes in rehabilitating troubled homes, a private equity firm is judged on its ability to take over a struggling company, fix it and later sell it for a profit.

The Palm deal would enable Elevation to install Jon Rubinstein, who once headed Apple’s iPod division, as Palm’s “executive chairman,” working alongside CEO Ed Colligan. In a conference call with investors on Monday, Colligan – who has known McNamee for 20 years – said Rubinstein’s role will be to oversee product development, while Colligan would focus on other responsibilities.

McNamee and fellow Elevation founder and managing director Fred Anderson, the former chief financial officer of Apple, will join Palm’s board. At Apple, Anderson was credited with helping chief executive Steve Jobs reverse the company’s fortunes after it verged on bankruptcy in 1996.

With its iPhone slated to go on sale in a matter of weeks, Apple will join Research In Motion, the maker of BlackBerry, as Palm’s prime competitors in the “smart phone” field. McNamee said the competition will energize the field.

“I and everyone at Elevation and everyone at Palm, we all expect the iPhone to be phenomenally successful,” McNamee said. “It looks great. Everybody I’ve talked to who has actually played with it says it is great.

“We are actually incredibly enthusiastic about it. We’re very optimistic and very bullish about what this says about the prospects for the category.”

Palm last week unveiled a smart phone complement called the Foleo, a kind of mini-laptop that has a larger screen, full keyboard and automatic on-off feature. The Foleo is expected to be on sale later this summer.

Elevation, which struck its first deal in November 2005, is known for its impressive “all-star” roster of talent – and not just Bono, said professor Lerner. Its managing directors formerly included John Riccitiello, who left Silver Lake to become chief executive of Electronic Arts.