Investment firm attracted to Palm's software expertise

One of the main attractions of Palm's business was its software expertise, according to private-equity firm Elevation Partners, which plans to acquire about 25 percent of the struggling mobile device maker.

Ending speculation that Palm would be gobbled up by mobile phone vendors Motorola or Nokia, Elevation said Monday it would pay $325 million to buy approximately one quarter of Palm's shares. Subject to shareholder approval and other closing conditions, the deal is due to be completed in the third quarter of this year.

Elevation has been looking closely at Palm for the last six to seven months, said Roger McNamee, a managing director and co-founder of the private-equity company. He believes limits are being reached in hardware design for mobile devices, with a sense that the devices can't be shrunk any further without losing the functionality customers expect.

McNamee admitted that Palm had been out of sync with developments occurring in the mobile hardware device market.

"They'll close that gap relatively soon, then the game will be all about software," he said. "Software is where this company [Palm] truly excels."

The company has struggled in the face of strong competition from Motorola and Nokia with their smartphones and has found it hard to sell its products to corporations hooked on Research in Motion's BlackBerry devices.

At the same time, Palm anticipates that more and more people will access the Internet from mobile devices. "We're incredibly well positioned to pursue that opportunity," said Ed Colligan, Palm president and CEO. "We have a broad range of software efforts underway here. Software is the battleground of the future." Palm continues to design systems infrastructure, applications, and services, which it's extending into different form factors, including its new Foleo handheld computer, he added.

Once the deal closes, McNamee is set to join Palm's board of directors along with his colleague at Elevation, Fred Anderson, Apple's former CFO.

The debut of Apple's iPhone, the company's first ever cell phone, due out June 29, will benefit Palm, McNamee said. "We've every reason to believe that the iPhone will be incredibly successful," he added. "It's a chance to bring software to the fore. Palm has a long tradition of great user interface design."

Elevation's investment in Palm is all about providing the vendor with better resources to execute on its current product road map, McNamee said, to both retain its current employees and attract new talent. The investment will also enable Palm to continue making small acquisitions, Colligan added, with the company expecting to have more than $300 million in cash on its balance sheet once the Elevation deal closes.

Palm and Elevation are pinning their hopes for positive changes to Palm's development processes on a third new board member, Jon Rubinstein, who will join Palm as its executive chairman. They're looking forward to the combination of Rubinstein and Palm's founder and current technical guru Jeff Hawkins.

While Rubinstein helped in the creation of Apple's iPod music player and iMac computer, Hawkins pioneered both the first handheld and smartphone devices. "It's a team that can't be beat," McNamee said. Colligan added that while Hawkins has a good feel for the "next big thing" in technology, Rubinstein is very strong on the execution of product development.