Faced with mounting competition in the smart-phone market, Palm Inc. (PALM) is selling a quarter of its company to a private equity firm to arm itself with new leadership, most notably the former technical guru behind the iPod.

The deal with Elevation Partners — which agreed to invest $325 million for a 25 percent stake in Palm — will infuse new talent in the handheld computer pioneer as it battles stiffening competition that will only get tougher with Apple Inc.'s (AAPL) June 29 launch of the iPhone.

"This is great for Palm, and it was probably the right time to bring in a change in top leadership," said industry analyst Tim Bajarin, president of Creative Strategies, a consulting firm. "They needed a significant cash investment to take it to the next level and a partner who had the same vision."

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As part of the deal, Palm will pay a special distribution of $9 per share, or about $940 million in cash, to shareholders. It said the special distribution would be financed by the new investment, cash on hand and $400 million in new debt.

Palm, best known for the Treo line of smart phones, said two board members — former CEO Eric Benhamou and D. Scott Mercer — will resign.

Elevation partners' Fred Anderson and Roger McNamee will join Palm's board, and Apple Inc.'s former top hardware engineer, Jon Rubinstein, will join the board as executive chairman.

Rubinstein ran the iPod division at Apple from 2004 to 2006 and was key in the creation of Apple's iMac computer before that. He was part of the executive team that joined Apple after Steve Jobs returned to run the company.

Anderson, the former chief financial officer of Apple, recently agreed to settle Securities and Exchange Commission charges related to a stock options backdating probe at Apple.

He also agreed to pay about $3.5 million in fines, without admitting wrongdoing. Anderson also serves as a director of eBay Inc. (EBAY) and Move Inc. (MOVE)

Among Elevation's five partners, besides Anderson and McNamee, is the rock star Bono, lead singer of U2.

Elevation's investment in Palm is the firm's largest ever.

"We don't think Palm is faltering or that there's anything wrong with the present," McNamee said in an interview. "We just think the future is incredibly bright."

The $1.9 billion private equity firm seeks to strengthen Palm's position as it competes against more deep-pocketed rivals.

"Today, you can't get your highest valued content to your phone, other than e-mail," McNamee said. "And we think that's going to change in the future."

Sunnyvale-based Palm was the subject of extensive takeover speculation this year as it hired Morgan Stanley (MS) to examine its options, including a complete buyout. A range of major tech companies and private equity firms were rumored suitors.

"We were approached by larger parties over the last six months," Palm Chief Executive Ed Colligan said, declining to be more specific. "The reality is that we thought this was the best outcome for our business and our investors."

For years, Palm's primary smart-phone competitor was Research in Motion Ltd. (RIMM), maker of BlackBerry devices. But as Nokia (NOK), Motorola Inc. (MOT) and Samsung Electronics Co. entered the fray last year with lower-priced, slimmer, consumer-oriented models, Palm's once-groundbreaking Treo design began to appear stale.

Colligan said in a conference call with analysts Monday that Palm's roadmap for the next year is set, but he is looking forward to working with Rubinstein and drawing on his proven record of producing innovative products.

Rubinstein will work with Palm's co-founder and top product designer, Jeff Hawkins, who pioneered the Palm Pilot and Treo smart phone.

"That's just a team that can't be beat," McNamee told analysts.

Seeking to recapture its innovative streak, Palm last week introduced a new laptop-like device, the Foleo, to work with smart phones.

The gadget was panned by many industry observers, but Bajarin said he thinks Elevation's investment signaled that Palm likely had more promising products ahead.

"I have to believe that if Rubinstein and McNamee have backed Palm, they see something that the rest of us don't," Bajarin said. "There's something else up their sleeve."

Shares of Palm gained more than 9 percent, or $1.48, to $17.57 in Monday trading.

Palm said the deal, which needs shareholder approval, will leave the company with more than $300 million of cash after the transaction.

"The management shake up at Palm is the key takeaway," Think Equity analyst Jonathan Hoopes wrote in a note. "Today's deal should quiet skeptics as these new investors in Palm have 'been around the block' and clearly understand the value of a global brand, of a foundation based on software, and of design acumen."

Some analysts, including Andrew Neff at Bear Stearns (BSC), speculated the board restructuring could lead to a partnership with Apple, but Colligan declined to comment, saying only that Palm "looks at them as a competitor and will continue to compete with them."

Neff upgraded his bearish rating on Palm's stock from "underperform" to "peer perform," betting the private equity firm's involvement will address some investor concerns.

But, he said, the company still has plenty of work ahead.

"Fundamentally, Palm faces numerous challenges with intense competition in its phone business, a decline in its old handheld business and the lackluster response to the new product demo'd last week," Neff wrote in a note.