Will Palm's sale create a windfall for U2's Bono and partners?

Q: What's the connection between one of the world's top rock and roll performers and a sinking U.S. smartphone maker? A: Venture capital.

Bono, lead singer and a guitarist for the Irish rock group U2, is one of five professionals on the investment team for U.S.-based Elevation Partners, which has invested in Palm. News broke this week that Palm is actively looking for a buyer

"U2's Bono set for multi-million pound Palm windfall" declares an enthusiastic headline at the U.K.'s Telegraph news site

Of course, the same could be said of the other four members of the investment team, but they're not rock stars, at least not real rock stars.

There's only one problem with the Telegraph's prediction: How much of a windfall, if any, Bono and the other Elevation investors will get depends entirely on what a buyer is willing to offer. In fact, there's a chance Elevation may not even recoup the more than $400 million it has invested so far in Palm.

Elevation struck a "strategic recapitalization" deal with Palm in 2007, buying $325 million of a new series of convertible preferred stock, giving the fund about a 25% ownership stake in the handheld company. It brought on Jon Rubinstein, former senior vice president and head of Apple's iPod division. Also part of the deal: $400 million in new debt.

In December 2008, Elevation raised its stake, investing an additional $100 million, bringing the total to $425 million, and giving it about 30% of Palm

In early 2009, the "new" Palm unveiled the Palm Pre smartphone, and an innovative new operating system, webOS, which is a Linux kernel with an embedded Webkit engine (also used on a number of desktop and mobile Web browsers) as the execution engine for applications written in HTML, Javascript, and Cascading Style Sheets. The Pre went on sale in June 2009 exclusively on Sprint.

This week, as sales of the new Palm smartphones, developed in part by Elevation's money, continued to lag, it was reported that Palm had begun looking for a buyer. The question is: Is anyone interested? And if they are, what are they willing to pay for a company whose entire platform strategy is failing?

For the record, Elevation tells Reuters that it is solidly behind Palm and its management, in "working through short-term execution challenges with Elevation's complete support." 

TechCrunch has recently been looking into Elevation's financial situation. It reports that Elevation's complex funding mechanisms minimize the company's risk, so that it can still break even on the Palm investment, despite Palm's stock hovering around $5 a share

The Reuters story above noted: "While Palm's share price has plunged 72 percent since the first deal in June 2007, the value of Elevation's investment has been maintained by the terms of the original deals. Palm's filings show that Elevation has invested a total of $460 million in the company, an investment that is worth $432 million today based on Friday's close of $4.00." The stock price has edged up to around $5.00.

Secondly, Elevation secretly bought $90 million in Facebook shares (about 1%) on the secondary market, late in 2009, a move that could keep Elevation in the black

Bono (born Paul Hewson) joined Elevation Partners shortly after it was formed in 2004. According to Wikipedia, the company's name is taken from U2's 2000 song, "Elevation." The company was founded by two former members of Silver Lake Partners, Roger NcNamee and Marc Bodnick, along with Fred Anderson, formerly of Apple, and John Riccitiello, formerly of Electronic Arts.

As a different news site put it: "Bono A Great Singer, But Bad Investor?"

Tags Palmsmartphonesinvestment fund managersElevationU2

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John Cox

Network World

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