Elevation Salvation: HP To Buy Palm for $1.2 Billion

Well, it’s official: Palm will not go bankrupt. Nor will it be Palm for much longer.

The troubled PDA maker today agreed to be acquired by HP for $1.2 billion, or $5.70 per share. That’s a 23% premium to Palm’s closing price today, and a 54% premium to where Palm was trading when I last wrote about its prospects.

The technorati already is trying to figure out the strategic purpose of this deal, with early consensus being that HP wants Palm’s well-regarded OS to serve as the basis for an upcoming tablet. I don’t pretend to know, although that makes sense (HP certainly isn’t looking to acquire the throngs of Pre owners because, well because there aren’t throngs of Pre owners).

What I can say, however, is that this deal is terrific news for Elevation Partners, the private equity firm that had invested more than 25% of its $1.8 billion debut fund into Palm. No one at Elevation is going to pretend this is a homerun, or even a single, but it certainly is a save.

As a quick refresher, here is how Elevation’s investments in Palm broke out:

• 2007: $325m Series B convertible preferred shares ($8.50 conversion price)
• 2008: $51m Series C convertible preferred shares ($3.25 conversion price). This deal was originally $100m, but Palm exercised its right to buy back $49m. It also included 3.6m warrants at a $3.25 strike price.
• 3/09: $49m of common stock (8.2m shares at $6 per share). This was a rollover of the proceeds from Palm’s buyback of Series C convertible shares.
• 9/09: $35m of common stock (2.2m shares at $16.25 per share)

My back of the envelope math shows that Elevation would net around $485 million, compared to the $460 million in total investment.

Again, not a deal to brag about — but not one that Elevation will need to spend the next year apologizing for either. That last point is important, because the firm does indeed plan to raise a second fund (as evidenced by the forward-looking compensation structures of several new partners). Maybe Elevation even had a hand in the HP sale, although that is baseless speculation.

An Elevation spokesman declined immediate comment, but said the firm may be willing to talk tomorrow. Also worth noting that HP CEO Mark Hurd isn’t on the conference call. My best guess is that’s because he was previously-scheduled to appear at the Silver Lake Partners annual meeting.

Here is the press release from HP:

HP (NYSE: HPQ) and Palm, Inc. (NASDAQ: PALM) today announced that they have entered into a definitive agreement under which HP will purchase Palm, a provider of smartphones powered by the Palm webOS mobile operating system, at a price of $5.70 per share of Palm common stock in cash or an enterprise value of approximately $1.2 billion. The transaction has been approved by the HP and Palm boards of directors.

The combination of HP’s global scale and financial strength with Palm’s unparalleled webOS platform will enhance HP’s ability to participate more aggressively in the fast-growing, highly profitable smartphone and connected mobile device markets. Palm’s unique webOS will allow HP to take advantage of features such as true multitasking and always up-to-date information sharing across applications.

“Palm’s innovative operating system provides an ideal platform to expand HP’s mobility strategy and create a unique HP experience spanning multiple mobile connected devices,” said Todd Bradley, executive vice president, Personal Systems Group, HP. “And, Palm possesses significant IP assets and has a highly skilled team. The smartphone market is large, profitable and rapidly growing, and companies that can provide an integrated device and experience command a higher share. Advances in mobility are offering significant opportunities, and HP intends to be a leader in this market.”

“We’re thrilled by HP’s vote of confidence in Palm’s technological leadership, which delivered Palm webOS and iconic products such as the Palm Pre. HP’s longstanding culture of innovation, scale and global operating resources make it the perfect partner to rapidly accelerate the growth of webOS,” said Jon Rubinstein, chairman and chief executive officer, Palm. “We look forward to working with HP to continue to deliver industry-leading mobile experiences to our customers and business partners.”

Under the terms of the merger agreement, Palm stockholders will receive $5.70 in cash for each share of Palm common stock that they hold at the closing of the merger. The merger consideration takes into account the updated guidance and other financial information being released by Palm this afternoon. The acquisition is subject to customary closing conditions, including the receipt of domestic and foreign regulatory approvals and the approval of Palm’s stockholders. The transaction is expected to close during HP’s third fiscal quarter ending July 31, 2010.

Palm’s current chairman and CEO, Jon Rubinstein, is expected to remain with the company.

Audio webcast

Today at 5 p.m. ET / 2 p.m. PT, HP will conduct a live audio webcast for financial analysts and stockholders to discuss HP’s agreement to acquire Palm.

The webcast will be hosted by Todd Bradley and is accessible at www.hp.com/investor/webcast.

About Palm

Palm, Inc. creates intuitive and powerful mobile experiences that enable consumers and businesses to connect to their information in more useful and usable ways. The company’s groundbreaking Palm webOS platform, designed exclusively for mobile application, introduces true multitasking and Palm Synergy, which brings your information from the many places it resides into a single, more comprehensive view of your life. More information about Palm, Inc. is available at www.Palm.com.

About HP

HP creates new possibilities for technology to have a meaningful impact on people, businesses, governments and society. The world’s largest technology company, HP brings together a portfolio that spans printing, personal computing, software, services and IT infrastructure to solve customer problems. More information about HP is available at http://www.hp.com.

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