NYT article about 3Com / Palm Inc IPO.
February 13, 2000
How to Get in Early on a Hot Offering
By LAWRENCE M. FISHER
The initial public offering of Palm Inc., scheduled for Feb. 28, promises
to be the next hot deal unavailable to most individual investors. But
there's a twist.
Because Palm is being spun out of the 3Com Corp., which will still own 80
percent of the company after the offering, buying 3Com today means owning
Palm tomorrow and sharing in the potential upside.
The Palm deal has almost
everything an investor could want
in a new issue. First, there is
strong brand: Palm has a 70
percent share of the market for
hand-held computing devices,
despite the best efforts of
Microsoft and all the hardware
companies that license its
Windows CE operating system;
more than 5.5 million Palm Pilots
have been sold.
There is also that emerging
Internet platform, as Palm strikes
deals with America Online,
Motorola and Nokia. And, finally,
Palm has a new star chief
executive in Carl J. Yankowski, the
man who sold America the Sony
Walkman.
"From a valuation standpoint, you've got to like it," said William F.K. Schaff,
manager of the Berger Information Technology fund, who owns 3Com and
will be seeking to buy Palm at the offering. He expects an immediate pop in
palm stock. "I have no doubt that it will rise 50 to 60 percent."
Other investors think it can go far higher.
So if your broker owes you any favors, beg and plead and maybe you can
get 100 shares at the offering price, which is expected to be in the
$14-to-$16 range. On the other hand, you can buy all the shares of 3Com
that you can afford -- the stock now trades at $62.3125 -- and own
four-fifths of whatever market value the market assigns Palm, plus the
underlying 3Com business.
Charles A. Morris, manager of the T. Rowe Price Science and Technology
fund, said he expected Palm's offering to sizzle -- and to give 3Com a nice
bump in the process. His fund owns four million 3Com shares. "What usually
happens is the spun-off unit does extremely well," he said. "And I think that
will happen with Palm, because it does have 70 percent market share in spite
of having to compete with everybody else selling Windows CE-based devices
-- and it also drags the parent along with it."
There are precedents. "The best proxy is HNC Software," he said, referring
to the San Diego company that spun off its Retek unit last November. "It just
puttered along for a while and when the spin happened the thing took off like
a scalded dog."
Morris said he expected Palm, which earned $29.6 million last year, to have
about $1.2 billion in 2000 revenue. He predicted that shares would trade at 20
to 30 times sales, giving the company a market capitalization of $25 billion to
$35 billion.
"So it's going to be worth, in our estimation, $70 to $100 per share," he said.
Meanwhile, he noted, 3Com will still have its existing networking business
and what he calculates to be about $10 per share in cash, in addition to its
interest in Palm. "So you carve it all up," he said, and can get a 3Com stock
price "north of $100, with the stock at about $60 today."
A little history may be in order. Founded in 1992, Palm originally sold a
program called Graffiti, which allowed users to enter text with a pen on
devices like Apple Computer's Newton and other personal digital assistants,
known as PDAs, of the day.
When that market tanked, Palm ran out of money and was acquired by U.S.
Robotics, the modem maker, which gave it the resources to develop the Palm
OS operating system and the Palm Pilot. 3Com, of Santa Clara, Calif., bought
U.S. Robotics in 1997, only to watch the imploding modem business drag its
earnings to the floor.
Earlier in its history, 3Com had a clear shot at being the dominant company in
computer networking. But it lost ground early on to Novell Inc., which
emphasized software over hardware, and more recently to Cisco Systems.
When it became clear that Palm was the shining star in 3Com's firmament,
the Palm founders, Jeff Hawkins and Donna Dubinsky, began urging that the
unit be spun out. Stymied by Eric Benhamou, 3Com's chief executive, the
pair left and founded Handspring, a Palm licensee, which now produces a
competing hand-held device.
Of the Palm offering, Ms. Dubinsky's opinion seems to be, better late than
never. "I thought it was the right thing to do when I recommended it 18
months ago," she said.
Another way to view Palm's potential is to look at the number of devices
projected to soon be connected to the Internet, and to estimate how many are
likely to be hand-held and run Palm OS.
"There are 435 million PCs in the world, but Intel is saying that by the end of
2001 there will be one billion devices connected to the Internet," said Michael
Murphy, editor of the California Technology Stock Letter. "There are only
going to be 600 million PCs by then, so that leaves 400 million other things,
and a lot of those will be hand-held devices. Everybody except Microsoft
doesn't want Windows CE to own the world, so they've consolidated around
Palm in a remarkable way."
Geoffrey Moore, president of Chasm Group, a consulting firm, called Palm
"the gorilla in the PDA category of nonwireless extensions to Windows PCs."
Murphy says major institutional investors have been waiting for the Palm
offering. "The big institutions want a direct way to play this," he said. "They
don't want to own 3Com because they see it as a weak No. 2 to Cisco." He
has been recommending 3Com since it was in the low $20s, last April, but
thinks that it is now about fully valued. Indeed, he thinks the company will
put itself up for sale after the spinoff is completed.
"There isn't a lot left in the stock after Palm, but it is a legitimate way for
individual investors to get Palm at the offering price," he said. "And if Palm
takes off like a rocket, it will pull 3Com up."
Copyright 2000 The New York Times Company |
