Palm investor to kick in an extra $100 million

This post was updated at 1:06 p.m. PST with the stock's closing price and comments from an interview with Elevation Partners Roger McNamee.

Christmas came early for Palm.

The struggling handset maker announced Monday that investor Elevation Partners has agreed to infuse Palm with an additional $100 million, in a move designed to provide a boost to its new product launches in 2009.

Shares of Palm soared on the announcement, rising as high as 49 percent in intraday trading Monday to $3.71 a share. And by the time the regular session ended, Palm finished the day up 22.5 percent to close at $3.05 a share.

Such news is brighter than Palm's Christmas season of 2007, when the company announced a $30 million revenue shortfall in its fiscal second quarter after canceling its lightweight Linux computer, the Foleo.

And for Palm, even better still is that Elevation Partners is willing to provide it with financial support despite the 2007 product cancellation, which in this current economic firestorm is an enviable shield.

Said Palm Chief Executive Ed Colligan in a statement:

The additional capital from Elevation Partners will enable us to put added momentum behind the new product introductions scheduled for 2009 and will provide us with enhanced stability in unsettled economic times.

Palm could be gearing up to release a new operating system, code-named Nova, with its mobile computing product line in the New Year.

In June 2007, Elevation Partners announced a $325 million investment in Palm that gave it a 25 percent stake in the company. With the investment announced Monday, Elevation will receive up to a 38 percent stake, if it doesn't sell a portion of its holdings to a third party.

Under the agreement, Elevation will receive newly issued preferred stock that will convert to common stock at $3.25 a share. That's a 31 percent premium over Palm's closing price on Friday.

The agreement, which is expected to close by January 31, also allows Palm to require Elevation to sell up to 49 percent of its $100 million investment to other investors at the same terms paid by Elevation, or under better terms, by March 31.

Proceeds from that sale would go to Palm.

"(Palm) management asked us to do it this way, because they realized this deal would be dilutive to existing investors and they wanted to give them a chance to participate at the same level we did," said Roger McNamee, Elevation Partners co-founder.

The private equity firm did not seek other investors to participate in the $100 million investment and McNamee said he doesn't know whether the company sought out other participants on its own.

But once the deal closes, Palm will have two months to find other investors to buy out a portion of Elevation's investment.

The private equity firm will also receive warrants to acquire 7 million shares of Palm's common stock at the same price.

For Palm, Elevation's investment announcement comes on the heels of its fiscal second-quarter results earlier this month, in which the handheld device maker announced revenue dropped 45.2 percent to $191.6 million over the same period last year.

As part of its second-quarter announcement, Colligan said in a statement:

We're working through an undeniably difficult period, but near-term challenges shouldn't overshadow the fact that we are on track to deliver a breakthrough new platform and products that will bring a truly differentiated smartphone experience to our customers and re-establish Palm as a leading innovator in the mobile industry.

McNamee said he believes very much in Palm's potential for success but that Wall Street assumes the smartphone category is all about Apple's iPhone and Research In Motion's Blackberry.

"Palm has an interesting alternative to the BlackBerry and Apple," McNamee said, pointing to Palm's upcoming appearance at the Consumer Electronics Show next month, where it's anticipated to debut its Nova.