June 4 (Bloomberg) -- Palm Inc., the maker of the Treo mobile phone and e-mail device, agreed to sell a 25 percent stake to private-equity firm Elevation Partners for $325 million and announced an overhaul of its board. The shares surged.

The money from the Elevation investment will help fund a $940 million payment to shareholders, equal to about $9 a share, Sunnyvale, California-based Palm said in a statement today. The company also added two former executives of Apple Inc., the maker of the best-selling iPod music player, as directors.

Palm is introducing new products to woo customers away from Research In Motion Ltd.'s BlackBerry designs and from Apple, which will introduce its iPhone this month. Earlier this year, Palm hired Paul Mercer, a software engineer who helped create the iPod, to design a line of new devices.

``It might take a little while here, but I think we've got a contender,'' said Jonathan Hoopes, an analyst at ThinkEquity Partners in New York who rates Palm shares ``buy'' and doesn't own any. ``They're bringing in fresh new people with the product ideas, combined with Palm's strong brand.''

Shares of Palm jumped $1.48, or 9.2 percent, to $17.57 at 4 p.m. New York time in Nasdaq Stock Market trading. The gain was the biggest in three months.

The company also faces growing competition from mobile-phone makers Motorola Inc. and Nokia Oyj, both of which introduced e- mail phones last year. Palm posted its first sales decline in three years in December after delaying the introduction of its latest Treo model in the U.S. until January.

The Foleo

Palm has sought to rely less on the Treo for sales, introducing the lightweight Foleo personal computer last week. Analyst Mike Abramsky of RBC Capital Markets called the product ``disappointing'' in a research note, while JPMorgan Securities Inc. analyst Paul Coster said it would appeal to a niche market.

Palm, which has increased spending at the expense of profit, hired Morgan Stanley to help evaluate options including a sale of all or part of the company.

Jon Rubinstein, Apple's former hardware chief, will become Palm's executive chairman. Fred Anderson, a partner at Elevation and a former Apple finance chief, and Roger McNamee, another Elevation partner, also will join Palm's board. Palm Chairman Eric Benhamou and director Scott Mercer will step down, leaving the board with nine members, compared with eight before.

``It doesn't hurt to get a few very visible names on our team,'' Chief Executive Officer Ed Colligan said in an interview.

The changes will help Palm recruit engineers and executives in competitive Silicon Valley, McNamee said in an interview.

Getting `Shine Back'

``If you go back only a few years, one of the ways Apple got its shine back was by recruiting people out of Palm,'' he said. ``The great people go to the great opportunities at the great times.''

Under the terms of the recapitalization plan, Elevation will purchase $325 million of a new series of convertible preferred stock with a conversion price of $8.50 a share. The payout to shareholders comes from the Elevation investment, $400 million of new debt and Palm's existing cash.

Elevation's managing directors include U2 lead singer Bono, whose real name is Paul Hewson. The company, named after one of the rock band's songs, has invested in media and entertainment companies since 2005, including online real-estate agent Move Inc. and magazine owner Forbes Inc.

The Palm investment is Elevation's largest. JPMorgan is acting as financial adviser to Elevation.

Elevation Enthusiastic

In March, Palm reported a 61 percent drop in third-quarter profit because of advertising and development spending to stem the loss of customers to BlackBerry devices. Net income slid to $11.8 million from $29.9 million a year earlier.

As part of its efforts, Palm last week said it will start selling the Foleo, which is smaller than a standard laptop and larger than a mobile phone. The Foleo has a 10-inch screen and full keyboard, letting users browse the Web, send e-mail and edit documents.

``The new leadership team is well positioned to add design, marketing and engineering capabilities to Palm's wireless know- how,'' Coster of JPMorgan said today in a report. He rates the shares ``underweight.''

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

Last Updated: June 4, 2007 16:07 EDT