Palm’s new millions raise questions

Elevation Partners, the VC firm that invested $325 million last year to revive Palm, left $100 million under the tree for the handset pioneer.
But that tree is bedecked with candycanes in the shape of question marks.
The cash infusion announced Monday comes just two weeks before Palm is set to roll out its next-generation mobile platform, dubbed Nova, and possibly hardware powered by it, at the Consumer Electronics Show in Las Vegas on Jan. 8.
Analysts have expressed concern over the company’s “cash burn,” or the rate that operational costs eat through existing capital. Their view of the new cash infusion ranged from a wait-and-see attitude on Palm’s new OS to downright skepticism.
“The timing of the new Elevation investment is bad for common shareholders … very peculiar,” wrote Global Crown Capital L.L.C. analyst Pablo Perez-Fernandez in a note to investors today. “Palm should have waited until after CES to minimize the dilution to current shareholders … because the shares would have almost certainly rallied.”
“The new cash infusion suggests to us that Palm’s internal plans may now be predicting a worrisome level of cash burn – a far worse than expected by most on the Street,” Perez-Fernandez said.
Analyst Peter Misek at Canaccord Adams agreed that the new investment sent “mixed signals.” Misek also said the cash infusion “may foreshadow a material cash burn over the next few quarters.”
The new money means that common stock holders own about 54% of the company, down from 66%, according to Tavis McCourt at Morgan Keegan.
The squeeze, according to Perez-Fernandez, may come in the several quarters before any Nova-related revenue will reach Palm’s books.
“The real issue here is that demand for Palm’s product appears to us to have dried up,” Perez-Fernandez wrote. “We suspect that one or multiple U.S. carriers may have curtailed marketing Palm’s products.”
Elevation Partners acquired newly issued, Series C preferred stock convertible into Palm common stock at $3.25 a share. The VC firm also will receive warrants to buy an additional 7 million shares of common stock at the same price.
Palm’s stock soared more than 22% on Monday’s news, and rose another 11% on Tuesday.
“The additional capital from Elevation Partners will enable us to put added momentum behind the new product introductions scheduled for 2009 and will provide us with enhanced stability in unsettled economic times,” said CEO Ed Colligan, in a prepared statement.
The transaction is expected to close Jan. 31.