Elevation Partners LP’s $460 million investment in Palm Inc. got rescued yesterday when Hewlett-Packard Co. agreed to buy the money-losing phone maker.
Elevation, a private-equity firm co-founded by Roger McNamee and U2’s Bono, had bet a quarter of its $1.9 billion fund on Palm since June 2007. It will get back $485 million, a 5.4 percent gain, after Hewlett-Packard’s $1.2 billion purchase.
The acquisition follows 11 straight money-losing quarters at Palm, which hemorrhaged cash to promote its new Pre and Pixi phones. Elevation’s return far exceeded the 65 percent plunge in Palm shares over that stretch and the 22 percent decline in the Standard & Poor’s 500 Index. Still, it’s not the kind of gain that investors in private-equity firms expect, said Steven Kaplan, a professor of finance at the University of Chicago Booth School of Business.
“They placed a very big bet on this one,” said Kaplan, who teaches classes on private equity and venture capital. “Getting your money back is OK, but it’s sure not the outcome they had hoped for when they made the investment.”
By purchasing a combination of common stock, convertible preferred shares and warrants, Elevation took a 30 percent stake in Palm and protected its investment. The firm’s initial $325 million was in convertible preferred stock that can be exchanged for $8.50 in cash per share. Elevation also had three of Palm’s eight board seats.
Even so, the investment was in the red before the Hewlett-Packard deal, based on Palm’s closing price of $4.63 yesterday. Hewlett-Packard offered a 23 percent premium on the common shares.
Paul Kranhold, a spokesman for Menlo Park, California-based Elevation, said the board members support the deal.
Elevation finished raising money for its fund in 2005 and has since invested in at least seven ventures. They include real estate Web site Move Inc., publisher Forbes Media LLC and business-review site Yelp Inc. In its only previous sale, Elevation doubled its money on video game companies BioWare Corp. and Pandemic Studios LLC, which were purchased as a package by Electronic Arts Inc. in October 2007.
Elevation has bolstered its investment team and plans to raise a second fund. In November, the firm hired former EBay Inc. executive Rajiv Dutta. Two months later, Avie Tevanian, who was Apple Inc.’s chief software technology officer until 2006, joined the firm.
Palm was the firm’s biggest investment, and Elevation set out to revamp the company. Fred Anderson, an Elevation co-founder and former finance chief at Apple, recruited Jon Rubinstein to be chief executive officer. In January 2009, Palm introduced the Pre, based on a new operating system called WebOS. The software was created by Rubinstein to compete with Apple’s iPhone and Research In Motion Ltd.’s BlackBerry.
Palm looked like it might lift Elevation’s fund last year, when the stock more than tripled. The Pre hit the market in June, followed by the smaller, cheaper Pixi in November. The phones didn’t sell as well as expected, even after a new partnership with Verizon Wireless.
The company said last month that revenue in the quarter ending in May will be less than $150 million, compared with the $300 million average estimate of analysts surveyed by Bloomberg.
Palm’s share of the U.S. smartphone market fell to 5.4 percent in February, from 9.4 percent a year earlier, according to ComScore Inc. Research In Motion leads the industry with 42.1 percent, followed by Apple, Microsoft Corp. and Google Inc.
“Clearly the market is extremely competitive and a lot of competitors are very large,” Rubinstein said yesterday in an interview. “Palm could have continued on its own, but clearly merging with H-P allows it to get to scale much, much, much faster.”