Palm: A Fall From Grace, But What's Really Going On Here?

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Look at Palm's stock and it's almost as if investors are ready to wash their hands of the downtrodden handset maker. Talk about a fall from grace: this is the company that virtually invented the smart wireless device, and today, courtesy of siliconalleyinsider,a shocking realization that the company's stock is worth less than its balance sheet.

The blog says that Palm's current market cap of $573 million is woefully short of its $369 million in cash and $259 million in short-term investments. Silicon Alley says the news is "deeply insulting to Palm's board and management," though it may also signal an "excellent investment," though Pacific Crest's James Faucette says the math is wrong; that the valuations being thrown around don't take into account Palm's recapitalization because of the Elevation Partners' investment.

And that's what I want to focus on, since there's no disputing that the deal was done, and that Palm's future could hinge on its success. Roger McNamee's Elevation wrote a $325 million check for a big stake in the company back in June. At the same time, Elevation installed former Apple whiz-kid Jon Rubenstein as Palm's executive chairman, along with former Apple CFO Fred Anderson and McNamee who both joined Palm's board.

When the deal closed in October, Palm was trading near $20 a share, its 52-week high. Since then, a nose-dive. Sure, the Elevation deal included taking on special, new debt of $400 million, or a $9 a share distribution to shareholders. Put that back in and Elevation is still way underwater on its investment. But was this a bad deal?

Lately, the company has been fending off a spate of bad news: rumors of hundreds of layoffs; product delays that are torpedoing the company's holiday shopping season; rumors that CEO Ed Colligan may be on his way out.

The company will report earnings Tuesday, but we already know the news will be bleak, thanks to a pre-announcement a couple of weeks ago that the company would miss its topline expectations by $30 million; its gross margins have been killed.

This is getting ugly, but it's leading to a lot of speculation that Palm's days as a public company may be slipping through the hour-glass. There's a growing sentiment in the Silicon Valley that Palm may go private; that this was the plan all along and that such a plan is getting far more affordable for the team at Elevation.

Sometimes, toward the end of a particularly bad season for a professional sports franchise, coaches get accused all the time of "throwing the season" so they get a better draft choice before the next season begins.

I'm not going to suggest that McNamee and his team are purposely sandbagging Palm so it becomes cheaper to take the company private, but wow. This has been such a precipitous tailspin in the three short months since Elevation got involved in Palm that you gotta wonder.

McNamee is a smart guy. He's not going to throw away this kind of money without the likelihood of dramatic upside. Now, he's sitting atop a company with arguably a big cash position, a hot new product in the $99 Centro smart phone, the new Treo 755p, a new operating system on the way in 2009, in an industry that might be the most exciting sector in technology. I reached McNamee this morning. He isn't commenting.

Look, bad news means better pricing. For McNamee's team; or another suitor looking to snap up Palm ahead of what could be a robust turnaround, or merely the cash on the company's books--if you believe it's there, for those willing to wait it out.

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