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Reorganization Creates 'Palmapple Inc.'

Jon Rubinstein, formerly senior VP and general manager of Apple's iPod unit, is named Palm's executive chairman.

In what is shaping up as something of an Apple alumni reunion, Palm is betting that its reorganization, announced after weeks of takeover speculation, will allow the company to respark growth while competing with much larger rivals such as Nokia, Motorola, and Samsung.

Palm will sell a 25% stake to private equity firm Elevation Partners for $325 million in a deal that brings in a former Apple senior executive as chairman and adds another to Palm's board of directors.

Palm's shares climbed 8.5% as investors hoped the cash infusion and the appointment of Jon Rubinstein, formerly senior VP and general manager of Apple's iPod unit, as executive chairman would revive the Palm brand -- while perhaps leading to an alliance of some form with Apple, which later this month will launch the iPhone, the most anticipated new mobile device in a decade.

Rubinstein's "role will be in strengthening and fine tuning our products engine," Palm chief executive Ed Colligan said on a conference call. "This is about allowing us to put a team in place to enable us to capture a leadership position."

Elevation co-founders Fred Anderson, Apple's former CFO, and Roger McNamee will join Palm's board, replacing Palm chairman Eric Benhamou and director D. Scott Mercer, who will both resign once the deal closes.

The reorganization follows last week's release of the Foleo, a mininotebook device designed as a large-display, full-keyboard companion to Palm's flagship Treo smartphone. Though Palm co-founder Jeff Hawkins described the Foleo as "the most exciting new product I've ever worked on," the Foleo was met with multiple thumbs down from the mobile and wireless community.

In fact, Monday's senior management turnover could be seen as a gentle shove aside to Hawkins, who is viewed as a genuine innovator for his hand in creating both the Treo and the Palm Pilot, but has not produced a breakthrough device since the 2002 debut of the Treo.

"The problem Palm had was that they created this top-secret 'skunkworks' team to develop the Foleo, but there was nobody allowed to perform a sanity check on whether this device was salable," one market observer said after last week's Foleo release. "Jeff Hawkins is a god at Palm, so nobody bothered to question this."

The addition of Rubinstein, considered one of the architects of the iPod phenomenon, means that Palm now has a stronger hand at the tiller -- and someone who can overrule Hawkins when necessary.

"While Palm has numerous near-term challenges, we are upgrading Palm shares ... in view of Palm's announcement [of] a private equity involvement by former Apple executives, as well as a valuation of around $17.50 [per share] for the Elevation Partners stake," Bear Stearns analyst Andy Neff said in a note to clients. Neff added that he expects alliance talks between Palm and Apple to emerge.

Such an alliance could be complicated by the unfolding stock-option backdating scandal at Apple. Anderson, the former Apple CFO, reached a settlement with the U.S. Securities and Exchange Commission in April over backdated stock options at the company. Anderson claimed that he relied on Apple CEO Steve Jobs in handling 2001 stock option grants that became the subject of an investigation and civil lawsuit. While Jobs has not been accused of any wrongdoing in the backdating practices, the investigation is ongoing.

The Palm deal is the largest investment to date for Elevation, which earlier took a $200 million stake in Forbes magazine.

Reuters contributed to this report.

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