Dec. 22 (Bloomberg) -- Palm Inc., the money-losing maker of the Treo and Centro mobile phones, rose 22 percent in Nasdaq trading after investor Elevation Partners LP agreed to pay $100 million to increase its stake.

Elevation will get preferred stock convertible into common shares at $3.25 each, Palm said today. The price is 31 percent more than Palm’s close Dec. 19. Elevation, whose managing directors include U2 singer Bono and private-equity investor Roger McNamee, bought a 25 percent stake in Palm last year.

The cash will fund new products and cushion Palm from the economic slump, Chief Executive Officer Ed Colligan said in a statement. The phone maker, which posted its sixth straight loss last week, is working on new operating software to compete with Research In Motion Ltd.’s BlackBerry and Apple Inc.’s iPhone, which have wrested away customers for Web-surfing phones.

“Palm’s balance sheet was strong before,” McNamee said today in an interview. “With the additional $100 million, it can withstand not only a difficult economic environment, but also the capital requirements associated with growing a brand new product line.”

Elevation is betting that Palm’s new software and devices will increase its share of the smart-phone market, where shipments grew 28 percent last quarter, according to Reading, England-based researcher Canalys. Palm isn’t among the top five makers of smart phones, a market dominated by Nokia Oyj, Apple and Research In Motion.

‘Fundamentally Different’

“Smart phones will gain a lot of share from feature phones over the next 10 years,” McNamee said, referring to models with basic features. Palm’s products will attract users by being “fundamentally different from Apple and RIM,” he said.

Palm, based in Sunnyvale, California, gained 56 cents to $3.05 at 4 p.m. New York time in Nasdaq Stock Market trading. The shares have dropped 52 percent this year.

The investment will give Elevation a 39 percent stake in the company, Palm spokeswoman Lynn Fox said. Elevation also has warrants to buy 7 million shares at the same price of $3.25 per share, which would boost its ownership to 41 percent.

“If they put this additional money in, it improves their viability,” said James Faucette, an analyst at Pacific Crest Securities Inc. He expects the shares to outperform the broader market. The cash infusion is a “chance to get a return on the entire investment,” he said.

Nova Software

Palm may introduce the new Nova software at the Consumer Electronics Show next month in Las Vegas, said Faucette, who is in Portland, Oregon. Colligan said last week that handsets with the new software will be available in the first half of 2009.

Palm Chairman Jonathan Rubinstein, who joined last year as part of the initial investment by Elevation, helped design Apple’s iPod music player. Apple’s iPhone was the best-selling mobile phone among U.S. consumers last quarter, according to Port Washington, New York-based research firm NPD Group Inc.

Palm can make Elevation sell up to $49 million of the new investment to other shareholders at the same or better terms by March 31, according to today’s statement. That option is designed to allow other long-term investors to take advantage of the terms, McNamee said.

To contact the reporter on this story: Crayton Harrison in Dallas at tharrison5@bloomberg.net

Last Updated: December 22, 2008 18:05 EST