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In the News — AP Feature

Palm’s Biggest Investor Stays On ‘Marathon’ Course



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Jan. 6, 2010 (Bloomberg) — Palm Inc.’s biggest shareholder, Elevation Partners LP, plans to hang on to its stake, saying the maker of the Pre can challenge Apple Inc. and Google Inc. in the smartphone market.

“We haven’t taken money off the table because we see a huge market opportunity here,” said Fred Anderson, who co- founded Menlo Park, California-based Elevation with Roger McNamee and U2’s Bono. “This is a marathon.”

After investing $460 million from 2007 through 2009, Elevation rode a threefold gain in Palm’s stock last year, buoyed in part by speculation that the company would be bought by Nokia Oyj. Elevation isn’t counting on a takeover, Anderson says. Instead, Palm can thrive by enlisting more carriers worldwide and adding phone applications, he says, even as Apple and Google step up competition.

Palm will discuss its next steps at a press conference tomorrow at the Consumer Electronics Show in Las Vegas. Palm plans to announce a partnership with Verizon Wireless at the event, according to a person familiar with the matter. Verizon, the top U.S. mobile-phone service, will sell Palm’s Pre and Pixi models starting this month, the person said.

Deal With AT&T

AT&T Inc., the second-biggest U.S. wireless carrier, said it too would be adding two phones from Palm, in the first half. Ralph de la Vega, head of AT&T’s wireless business, discussed the plans today at CES, without giving details on the phones.

Elevation’s bullishness isn’t shared by some investors, who don’t expect Palm to gain market share. The company’s short interest ratio, which measures whether investors are betting that the stock will fall, was 8.6 percent in December, compared with 0.6 percent for Apple and 1.9 percent for Google. Palm shares have tumbled 36 percent since reaching their 2009 high of $17.46 in September.

Google, owner of the most popular search engine, announced a new smartphone called the Nexus One yesterday. The phone uses Google’s Android operating system, which is developed openly by a worldwide community of programmers.

The Pre and Pixi phones, Palm’s first models using its new WebOS operating system, are currently only available in the U.S. through Sprint Nextel Corp., the country’s No. 3 carrier. That’s limited Palm’s pool of potential customers. Telefonica SA, based in Madrid, introduced the Pre in Europe in October.

More Applications

Palm also will open up its application platform at CES, allowing third-party developers to build programs, Chief Executive Officer Jon Rubinstein said last month. Palm has 800 applications from early partners and expects to have thousands soon. That compares with the Apple iPhone’s more than 100,000 applications.

“We have to establish a very strong developer ecosystem,” said Anderson, 65. That requires “a critical mass of very high quality third-party applications.”

Derick Mains, a spokesman for Sunnyvale, California-based Palm, declined to comment on takeover speculation or any future announcements. Palm used CES to unveil the Pre a year ago.

Elevation has a 30 percent stake in Palm. Its total investment has gained about 54 percent, based on the average purchase price of about $6.85 a share. In September, Elevation bought $35 million in stock at $16.25 a share, 54 percent higher than yesterday’s closing price.

Stock Rally

Palm rose 68 cents, or 6.5 percent, to $11.23 at 4 p.m. New York time on the Nasdaq Stock Market. The shares jumped more than fivefold in the first nine months of 2009 as investors waited for the Pre to catch on. Palm had traded for as little as $1.42 in December 2008, when its previous generation of devices was eclipsed by rivals’ newer smartphones.

The Pre and Pixi are a bid to restore the company’s reputation as a technology innovator. Still, even with the new devices, Palm has struggled to gain ground on the iPhone, Research In Motion Ltd.’s BlackBerry and Android phones. That’s fueled speculation that Palm would be better off getting acquired.

A takeover by Espoo, Finland-based Nokia, the world’s largest mobile-phone company, would make “strategic sense,” Shaw Wu, a Kaufman Bros. analyst in San Francisco, said in July.

Other potential suitors include Microsoft Corp. and Dell Inc., said Eric Risley, founder of Architect Partners, a Menlo Park-based merger-and-acquisition advisory firm.

Arja Suominen, a Nokia spokeswoman, said her company doesn’t comment on market rumors. Jennifer Davis, a spokeswoman for Round Rock, Texas-based Dell, declined to comment, as did Mark Murray, a spokesman for Redmond, Washington-based Microsoft.

‘Multiple Winners’

Palm doesn’t need to be acquired to succeed, said Anderson, who also serves on the company’s board. “This market is so big that you can have multiple winners,” he said.

Mounting competition may make it tough for Palm to stay solo, Risley said. Palm shares sank 13 percent after the company reported its 10th straight quarterly loss on Dec. 17.

“They’re going to have to get a break or get lucky to get some momentum,” said Risley, who has spent 18 years as a technology investment banker and was head of the software group at Bank of America Corp.’s securities unit. “It’s hard to compete against the huge wave that Apple and Android represent.”

Market Share

Palm’s share of the global smartphone market fell to 1.4 percent in the third quarter from 2.7 percent a year earlier, according to research firm Gartner Inc. in Stamford, Connecticut. Research In Motion, based in Waterloo, Ontario, increased its share to 20.8 percent from 15.9 percent, and Cupertino, California-based Apple rose to 17.1 percent from 12.9 percent.

Anderson, the former finance chief at Apple, co-founded Elevation in 2004. Rubinstein, who helped develop Apple’s iPod, was recruited by Elevation to become Palm’s chairman in 2007 and was named CEO in June.

Under Rubinstein, sales have yet to take off. Palm said last month that the number of smartphones shipped fell 5 percent in the third quarter from the previous period to 783,000. Prices have tumbled as well: The Pixi, released in November, can be purchased at Amazon.com Inc. for $24.99.

“What we aren’t necessarily seeing from Palm right now is that second, third, fourth device that’s going to build on the success of the Pre and really solidify their place,” said Elaine Sanfilippo, director of consumer technologies at Compete Inc., a Boston-based market research firm.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net


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