Palm’s safely in HP’s hands now, but for several years it’s been financially boosted by U2 frontman Bono’s company Elevation Partners. With their involvement wrapped up, the rocker’s financial experiment fared okay, but just okay [Ed.note: much like the quality of the last few U2 albums]. [Kit note: Blasphemy!]. Bottom line: Bono’s other band seems to have taken home a meager profit. We’ll explain.
First some background. Elevation Partners were Palm’s most influential investors in recent years, pumping cash into the company to get it through a dark period during which its sales were plummeting as the smartphone revolution bypassed the company’s products, and funding development of what was heralded as the first real “iPhone killer,” the Palm Pre. Involvement in high tech is no new thing for U2 members though, as their current 360º tour is sponsored by RIM’s BlackBerry (conflict of interest, much?) and Bono was once pally enough with Steve Jobs that there was a special edition U2 iPod.
Elevation bought a 25% stake in the company in 2007, spending $325 million on the deal, but kept injecting money until Palm’s financial disclosures revealed recently that EP had put $460 million of its money on the line, in total. This money put Bono’s financial guys in a certain controlling position inside the company, and the investors were even responsible for a bit of rock-star-style riffing, bringing ex-Apple guru Jon Rubinstein to center stage to change its fortunes. As recently as January, EP’s cofounder Fred Anderson noted they hadn’t taken “any money off the table” as they saw the effort to make Palm profitable as more of a “marathon” than a quick sprint to chart success.
And now HP’s bought the company, the financial press have been trying to work out exactly how the deal worked out for Elevation.
The U.K.’s Telegraph newspaper, the particular financial mix at the end of Palm’s previous business mode resulted in an enormous fiscal flop for Elevation Partners.
The HP deal valued Palm’s equity at $961 million, with the remainder as debt, which translates to a meager $320 million return to Elevation. That’s a $140 million loss, roughly 30% of the investment outlay, and would seem to be a disaster for EP.
That much cash lost wouldn’t necessarily hurt the Irish rocker himself, though: Back in 2006 his net worth was reckoned to be somewhere near $200 million…and with several hit albums since then, the figure will only have gone upwards.
Also, the math is way off, a source familiar with he deal tells FastCompany.com. And the numbers, the source said, line up closer to those reported at Efinancialnews. The short version of that: EP got $483 million from the deal, representing a profit of
$23 million–a margin of 5%, which is modest but nothing to be
sniffed at given the background of Palm’s disastrous smartphone failure.
The long version: That initial $325 million investment was for convertible preferred stock, at $8.50 a share, but it came with provisions for protecting the investment that meant on a termination of the deal (triggered by HP’s buy-out) EP would get all of that $325 million back, despite the fact that HP’s only paying $5.70 per share for Palm. EP’s second tranche of cash, of $51 million in December 2008, was also for convertible preferred stock, while the third and fourth investments in March and September 2009 were for $84 million in common stock (which will have converted into a loss). EP also separately bought 3.6 million warrants in December 2008, which will have generated $8.8 million for EP yesterday. Which brings us back to the $483 million figure.
There’s also an extra payment of $2 million which is triggered by a change of ownership, meaning EP cleared something more like $25 million in returns on their Palm adventure.
So Bono’s company was extremely shrewd and risk-averse when investing in Palm (smart, but not very rock-starry, a kind of metaphor for the state of music these days, actually.) But the negativity in the Telegraph’s piece is also relevant: Considering the time and effort and legal fees in achieving its final $460 million investment in Palm, $25 million is actually almost not worth it–and EP could easily have made much more profit elsewhere.
Still, EP is happy. “We support the transaction,” a spokesman said, declining to comment further.
So maybe Bono will pen a song about it? Or…maybe not, as such rampant capitalism doesn’t jibe well with the band’s progressive political and environmental messages. And maybe Bono should forget about co-funding big tech investments and just stick to the day job: Billboard magazine just ranked U2 as the top grossing act of 2009, with income over $108 million.