Elevation to install iPod head at Palm

In its biggest deal to date, the upstart private equity firm has agreed to invest $325 million for a one-quarter stake in Palm, the publicly traded maker of the Palm Pilot, as well as to tap the developer of the iPod as an executive chairman.

Elevation Partners, the Menlo Park, California-based private equity firm focused on technology and media investments, has agreed to invest $325 million in a recapitalisation of Palm, a Nasdaq-traded provider of mobile computing technologies.

Terms of the deal give Elevation a 25 percent stake in the company. Elevation partners Roger McNamee and Fred Anderson will join the company’s board. In addition, Jon Rubinstein, the former head of Apple Computer’s iPod division, will join the company as an executive chairman of the board. Anderson is the former chief financial officer of Apple.

Two directors of Palm will resign.

It is the biggest deal to date for Elevation Partners, which in 2005 raised a $1.9 billion debut fund.

Palm, the maker of the Palm Pilot handheld computer, traded near $600 per share at the beginning of this decade, but over the past five years the stock has failed to break $25 per share.

The deal with Elevation gives shareholders in Palm a $9-per-share payout, equal to a total value of $940 million. The value is also equal to roughly half of Palm’s current market capitalisation. Elevations investment will be in the form of convertible preferred stock, convertible at $8.50 per share, which is a 16 percent premium over the implied post-distribution value of the shares.

Palm will also finance its expansion through with existing cash and $400 million in new debt financing. Following the shareholder payout, Palm will continue to have $300 million in cash.

Before founding Elevation, McNamee was a co-founder of Silver Lake Partners, among the first technology buyout firms. The firm’s first deal was an exceedingly complex $2.2 billion acquisition of Seagate, a maker of disc drive technology.