Jon Rubinstein, former SVP of hardware engineering at Apple and head of the iPod division, is to become Palm’s executive chairman as part of far-reaching changes that will follow a deal for private-equity company Elevation Partners to take a 25% stake in the company.

Palm investors will receive a $940m cash payout, or $9 a share, from Elevation’s decision to invest $325m in the company and the assumption of $400m in new debt.

In a clear-out of the Palm old guard, former CEO and chairman Eric Benhamou and Scott Mercer are to quit the board to be replaced by Fred Anderson and Roger McNamee, managing directors and co-founders of Elevation. Anderson, Apple’s CFO for many years, hit the headlines earlier this year when he agreed to pay $3.5m to settle charges that he was involved in backdated stock-options grants. He also irked his former employer when he suggested that CEO Steve Jobs had a hand in allegedly fraudulent stock-options grants in 2001.

Elevation focuses on high-profile media, entertainment, and consumer-related businesses. It also boasts a superstar among its five partners in the form of U2 co-founder and anti-poverty campaigner Bono.

While not exactly facing poverty, investors in Sunnyvale, California-based Palm have had an anxious time of late on growing evidence that its market share was taking a mauling from RIM’s Blackberry devices. In its last quarter to February 28, net income fell 60.7% to $11.7m on sales that rose only 5.7% to $410.5m. This suggests that the company’s product line will be under considerably more pressure when Apple’s iPhone hits the market.

Elevation partner Roger McNamee said it is the largest investment that it had ever made. We see Palm as uniquely positioned to deliver the integrated software and hardware solutions that will drive the next generation of mobile computing, he said, suggesting an insight that had been denied the rest of the industry. Despite rumors that Nokia and Motorola had been circling the company, no bid was forthcoming.

Though Rubinstein’s appointment as executive chairman in charge of product development suggests a source of future tension with the CEO, he professed tremendous respect for the team. Approximately 1 billion cell phones are sold each year, and mobile computing is a category with enormous potential. This is a company with an impressive history of introducing game-changing products, he said, it pioneered the smartphone and I intend to help extend that legacy.

Elevation sees Rubinstein as the key to the transformation of the company and making it attractive to new talent. He joined Apple as SVP of hardware engineering in 1997. Rubinstein was instrumental in conceiving the iPod and became head of the business when it was spun off as a separate division in 2004. He also led the team that built the iMac.

Our View

A key to Steve Jobs’ transformation of Apple was his understanding that consumer electronics companies are poor at software. IT companies, expert at making complicated processes easy to use, could produce products far more attractive to the consumer. So Elevation is right to see in Palm a company that had the right software history to be successful in a rapidly growing market, especially when its product strategy is driven by an executive steeped in Apple’s culture. However, this is a competitive market, as much driven by fashion as technology, and it is up against companies with far greater muscle. The odds may be against it but the right piece of creative thinking could confound the pessimists and produce an outstanding success.