COMS
*Extra* With Wireless Packaging, Palm Could Pilot IPO to Bigger Payoff
By Adam Lashinsky
Silicon Valley Columnist
12/15/99 4:13 PM ET
The market's reaction to the impending initial public offering of 3Com (COMS:Nasdaq) subsidiary Palm shows just how valuable Wall Street expects the handheld device maker to be. The long-ago-subsumed U.S. Robotics (swallowed, painfully, by 3Com in 1997) bought Palm Computing from its founders in 1995 for just $44 million. Palm likely will collect more than that from Motorola (MOT:NYSE) alone, which has agreed to buy shares worth up to $65 million in Palm's IPO next year.
So frothy is the market already for Palm that 3Com's value increased by $2 billion on Tuesday. The excitement over 3Com's plodding stock comes because 3Com shareholders will receive the balance of Palm shares not offered in the IPO.
But what's even more interesting is the question of which analysts Palm's investment bankers will assign to follow the company. The three lead bankers are Goldman Sachs, Morgan Stanley Dean Witter and Merrill Lynch. According to sources familiar with Palm's IPO plans, the Merrill analyst on the deal will be Steve Milunovich, who has carved out a niche for himself as an information-appliance analyst, in addition to his big hardware responsibilities. Morgan Stanley's Alkesh Shah, who follows wireless concerns, will follow Palm for his firm. (I couldn't learn who Goldman's analyst will be, and no firm involved would discuss their coverage lineup while Palm is in registration with the Securities and Exchange Commission.)
Shah's coverage is noteworthy because, at first blush, Palm isn't a wireless company. Its parent is a data communications company, and personal digital assistants, or PDAs, arguably are part of the personal-computer industry. But wireless companies have much bigger multiples (the valuation investors pay in the stock price for each dollar of sales, earnings or other measurement). Palm is sort of a wireless company: Its Palm VII toy has a wireless modem for checking stock quotes, emails and the like.
So if Palm can convince other analysts that it indeed is a wireless company, that move could pay off once the company is public. Consider the following: At its current price, 3Com's stock is valued at about 3 times its annual sales of $5.7 billion (or sales per share of $16), about in line with computer manufacturers Dell (DELL:Nasdaq), Compaq (CPQ:NYSE) and Gateway (GTW:NYSE), which sell for an average multiple of 2.7 times sales.
But wireless companies Qualcomm (QCOM:Nasdaq), Nokia(NOK:NYSE ADR), Ericsson (ERICY:Nasdaq ADR) and Motorola sell for an average of 8.5 times their annual sales (a figure enhanced by Qualcomm's stratospheric valuation). If Palm goes public at 3 times its annualized sales of $704 million, it's worth a little more than $2 billion. And that annualized sales figure is based on its latest quarter, which is seasonally slow. But if the company can achieve a wireless multiple of 8.5 -- presto! -- it will create an IPO worth about $6 billion. That's some incentive.
Donna Dubinsky, CEO of Palm software licensee Handspring and a co-founder of Palm, guesses that the investment banks themselves are trying to figure out who should be covering Palm and, eventually, Handspring.
"What I have learned as I've met with all these guys myself is that there isn't really an analyst to cover" the PDA segment, she says. "This is such a converging of disciplines that I'm finding that with each individual banker it sort of depends case by case who is interested and who shows initiative for it." Handspring plans to go public next year.
Palm is profitable, growing and able to energize its moribund parent simply with the indication that it's going public. As a tech-industry success story and a high-growth start-up at once, Palm should define the tech IPO market in next year's first quarter. And pay attention to its brokers' intellectual gymnastics in trying to figure out how Palm should be categorized. That's when these behind-the-scenes flips and summersaults will matter.
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