Investor Just Can't Quit Palm

In a move of remarkable faith, the troubled smartphone maker's benefactor, Elevation Partners, has coughed up another $100 million.
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Updated from 11:54 a.m. EST

SAN FRANCISCO -- In for a penny, in for ... billions of more pennies.

Palm

(PALM)

announced Monday that sugar-daddy investor

Elevation Partners

, which bought a 27% stake last year in the struggling smartphone maker, has re-upped with another $100 million cash infusion.

Under the agreement, Elevation will buy new preferred shares that are convertible into Palm common shares at $3.25 each. Elevation also gets warrants to buy 7 million common shares at that same price.

Palm shares shot more than 17.3% higher in Monday afternoon trading to $2.92, and they are now off the deck of a scary 52-week low of $1.14 set earlier this month.

Elevation's latest stake isn't a complete surprise. As Robert Holmes

reported

last month, Elevation strongly refuted an analyst's report that the firm was giving up on Palm, with Elevation managing director Roger McNamee saying bluntly: "We have a very long-term investment horizon and have no plans to exit our investment in Palm."

A perfectly logical two-part response from investors would be a) why not?, and b) would you mind terribly if we watch from a distance?

The economic realities for Palm are bleak on many fronts. Even disregarding the huge tax allowance that threw a half-billion dollar loss on the books for the second quarter that Palm reported last Thursday, the company still had an operating loss of $77.5 million on revenue of $191.6 million, which was down 45% from a year earlier.

For the latest six-month period, Palm has posted a pretax loss of $140 million.

What's more (or less, really), Palm's cash and short-term investment position fell by 13% in six months to about $224 million.

Up against that figure is Palm's long-term debt of nearly $400 million.

All of that could be mitigated somewhat if the company was in a strong competitive position and overall consumer demand for smartphones was still high. Neither is happening. While Palm was able to find some market share earlier this year on the low end, consumers are now strapped, and any smartphone buzz this year has been dominated by new products from

Apple

(AAPL) - Get Report

,

Research In Motion

(RIMM)

and Google

(GOOG) - Get Report

.

Seriously, have you ever seen a photo of an emerging techno-geek wearing an "I Got the First Treo" T-shirt?

Of course, Palm and Elevation are hoping that changes, and a large part of the latest $100 million infusion, will give the company some breathing room as it nears the rollout next year of handsets running on Palm's new Nova operating system.

But even that isn't without potential problems, as several analysts are beginning to question whether the company can meet its projection of a launch in the first half of 2009.

The larger issue is the health of Palm's balance sheet by the time Nova handsets hit the stores. A long-term investment horizon is a nice luxury for Elevation, but for common shareholders, who face the prospect of further operating losses and additional share dilution, time may be running out.