I Fall Down

Palm/Bono: Elevation Partners has poured money into a few concentrated bets but is struggling to find what it's looking for — profits. The fund where Bono, the frontman of rock band U2, is a co-founder is now seeing its biggest gamble, the turnaround of handset maker Palm, starting to unravel.

Palm’s stock plunged by a quarter by early afternoon on Friday following the company’s earnings announcement. The main bombshell was that while Palm shipped 960,000 phones in the quarter ending February 28, it only actually sold about 40 percent as many.

Elevation’s fate rides largely on Palm, in which it has sunk $460 million. The investment firm has managed to double its $300 million investment in video game maker BioWare/Pandemic. But its other investments have given few signs they can outweigh any failure to deliver on Palm.

The firm bought 40 per cent of Forbes’ publishing business from the Forbes family in 2006, paying around $275 million according to news reports at the time. Since then, valuations of media rivals have melted down. If October’s sale of Business Week for $9 million is anything to go by, Elevation’s stake is hurting. And a $100 million investment in Move, an online realty services company, doesn’t look spectacular, either.

So the prospects for the Palm investment are crucial. Happily for Elevation, the combination of preferred stock, common stock and warrants it bought has protected it somewhat from Palm’s troubles — the holding is roughly breaking even so far. But if the firm’s phones don’t sell better in the next few quarters, the company’s cash burn could accelerate, and Elevation’s investment could head south.

Palm thinks adding a new cellphone operator partner — perhaps AT&T — could help, as might ironing out problems with Verizon, an existing partner. And its impressive smartphone operating system could yet attract new customers.

There are other options, too. Palm could license out its software, or even sell itself to a rival with more resources. But, smartphone competition is harsh and intensifying. Apple, Research in Motion, Nokia, Google and Microsoft are all backing differing operating systems. There’s still tomorrow. But time is running short.