Palm hands Wall Street an unusual deal

Although there have been a raft of deals with private equity firms buying out public tech companies, Palm's recent deal with Elevation Partners is breaking new ground.

Under the Palm deal, announced Monday, Elevation is buying 25 percent of the company. However, while billed as a recapitalization, Palm will actually end up with less capital than it had before the investment as the company returns US$940 million in cash to shareholders.

Palm and Elevation are quick to tout the benefits of their approach: Shareholders get US$9 a share in cash--more than half of Palm's current share price, while at the same time retaining a 75 percent interest in the company.

To make that happen, Palm is handing over not just the US$325 million that Elevation is investing, but also the proceeds of a US$400 million debt offering as well as some of its own cash.

Wall Street has generally reacted favorably--Palm shares have risen more than 9 percent since the deal was announced. However, the move to add debt to the balance sheet has raised some eyebrows.

Palm is already a small firm competing against larger device makers, such as Motorola and Nokia. And, though Palm's business is not typically capital intensive, the company does have to manage inventory, particularly as it launches new products.

Longtime Palm watchers recall problems the company encountered back in 2001 that led to a glut of inventory, causing Palm to burn through a substantial amount of its cash reserves.

Financial analyst Charlie Wolf said he was surprised Palm chose to return so much cash to shareholders, wondering why the company didn't choose a lower amount, say US$7 or US$8 per share.

"Nine dollars a share seemed pretty outrageous to me," said Wolf, a longtime Needham & Co. analyst who is now president of his own company, Wolf Insights.

That said, Wolf noted that Palm has plenty of cash on hand as well as tax benefits that mean that, provided its business remains on track, its cash flow should be more than ample to pay off the interest on its new debt.