Palm's new dough"”and new bood

Arik Hesseldahl
13 Jun 2007

Former Apple executive Jon Rubinstein had a knack for keeping the company's product development team on track. 'He drove the development of innovative products with rapid product cycles,' former Apple Chief Financial Officer Fred Anderson says of Rubinstein. A result of that effort was the iconic, best-selling iPod digital music player.

Rubinstein, who headed the iPod division while at Apple (AAPL), will get a chance to put that set of skills to use again as executive chairman of Palm (PALM). He's one of a handful of new officials assuming key roles at the maker of the Treo smartphone, which on June 4 said it's getting a $325 million cash infusion from Elevation Partners, the private equity fund run by Roger McNamee.

As part of the arrangement, Elevation will purchase a 25% equity stake, or about 25.8 million shares, and Palm will pay $940 million in cash, or about $9 a share, to existing shareholders. The deal values Palm at about $17.50 per share, a premium of more than $1.40 to the company's closing share price June 1.
Palm's New Panel

Equally as important as Palm's new dough is the company's new blood.

Anderson joins Palm's board, as does McNamee. Ed Colligan, long the heart and soul of Palm along with founders Jeff Hawkins and Donna Dubinsky, will remain chief executive officer, a post he's held since the 2005 resignation of Todd Bradley, now the head of Hewlett-Packard's (HPQ) PC division.

The board additions come at a crucial time for Palm, which had been exploring strategic options with the help of securities firm Morgan Stanley (MS) that some had thought would result in a sale. While Palm's revenue has been growing steadily"”it reported $1.6 billion in sales in fiscal 2006, from $950 million in 2004"”it's been under persistent attack from competitors like Canada's Research In Motion (RIMM), maker of the BlackBerry wireless e-mail device, and Motorola (MOT), maker of the Moto Q smartphone (see, 3/23/07, 'Palm's Fortunes, Cloudy Again'). Pressure will only increase with the entry of a new competitor, Apple, whose iPhone device launches June 29.

Who better to help gird Palm for the onslaught than former Apple folks‾ IDC analyst Randy Giusto says what Palm needs is a round of product upgrades that will appeal to consumers targeted by Apple's iPhone marketing blitz, but also stand up against RIM amid enterprises. When individuals buy a smart handheld for themselves, they tend to buy a Treo, Giusto says. But when the boss is footing the bill, the device is often a BlackBerry. 'The biggest thing that Palm needs is some serious innovation across its products lines,' Giusto says.

That gives RIM the market share edge. Palm's share of the U.S. smartphone market is about 18%, compared with RIM's 45%. Both have lost several percentage points of share to Motorola and its Q phone device, which debuted in mid-2006 (see, 7/20/06, 'Unmasking Motorola's Q'). RIM seems to have borne the brunt of that new competition better than Palm, as Motorola smartphones now count for about 12% of the market, IDC reckons.

The Apple in Palm's Eye

Anderson, who co-founded Elevation Partners with McNamee, stepped in as Apple's finance chief during the computer maker's darkest days in mid-1996. Apple was losing money, strapped for cash, burdened by debt, and its sales were in the doldrums.

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