Palm Inc, the struggling hand-held device company that makes the Treo, reached a deal on Sunday to sell a quarter of the company to Elevation Partners, a private equity firm, for about US$325 million as part of a plan to reorganize the company, according to people involved in the negotiations.
Jon Rubinstein, a former Apple executive who ran its iPod division, is also planning to join Palm as its executive chairman as part of the transaction.
The deal, which is expected to be announced yesterday, includes a plan to pay out about US$940 million in dividends to Palm shareholders, worth US$9 a share each, these people said.
The reorganization comes after several months of unsuccessful efforts to find a buyer for Palm, which is facing increasing competition from all directions including Microsoft, which now dominates the smartphone market with its Windows Mobile software.
Research in Motion, which makes the BlackBerry, is also a direct competitor, and Apple will soon enter the cellular phone market with its highly anticipated iPhone. And Google is said to be readying its own software competitor and is building alliances.
Palm, which invented the first hand-held organizers in 1992, held preliminary talks with several rivals, including Motorola and Nokia, and private equity firms including Silver Lake Partners and the Texas Pacific Group, but none was willing to buy out the entire company amid such uncertainty over its future, these people said.
The transaction with Elevation, a relatively new firm that bought a minority interest in Forbes last year, gives Palm an important cash infusion and also some experienced advisers.
Fred Anderson, a former chief financial officer at Apple, and Roger McNamee, a co-founder of Silver Lake Partners, both of whom are managing directors at Elevation, will also join Palm's board.
The deal is Elevation's largest.
Palm spent the last few months trying to play down the prospect of a buyout. Just last week, Palm's chief executive, Ed Colligan, told CNBC: "We're not focused on figuring out how to sell the company. We're focused on how to build the company and create long-term shareholder value."
During his time at Apple, Rubinstein, an engineer who developed high-performance computer workstations at Hewlett-Packard, oversaw successful products such as the consumer-oriented iMac and oversaw the development of the company's iPod music player. He retired from Apple in 2005.
Rubinstein will be joining Palm as it tries to break out with new products against its better-financed competitors.
Last week, Palm introduced a laptop computer called the Foleo that Palm's co-founder, Jeff Hawkins, said would serve as a large-screen peripheral for the company's Treo smartphone and Windows Mobile devices.
The introduction was greeted with skepticism by industry analysts who said that the system would find only niche market acceptance because most smartphone owners already own portable computers.
Under the terms of the deal, Elevation will purchase US$325 million of a new series of convertible preferred stock. The conversion price will be US$8.50 a share. Palm will take on about US$400 million in debt to pay out the dividend to shareholders. The deal is subject to shareholder approval.
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