Palm IPO seen white-hot, but red flags abound'...FYI
By Duncan Martell
<<PALO ALTO, Calif., Feb. 29 (Reuters) - With all the hype over 3Com Corp.'s initial public stock offering of its Palm Inc. unit, the No. 1 maker of electronic organizers, you might think it'll become the next Microsoft or Cisco.
Think again, some money managers and analysts say.
``Palm has zero chance of being the next Cisco or Microsoft,' said money manager Richard Slinn at San Francisco-based Levensohn Capital Management. ``It's a neat product but it's not a neat business.'
Of course, that's not to say Palm (NasdaqNM:PALM - news), which has sold 5.5 million of its handheld electronic organizers since their introduction in 1995, won't stage a hugely successful IPO later this week. Demand is so white-hot that 3Com (NasdaqNM:COMS - news) and Palm's underwriters on Monday doubled the amount expected to be raised to $736 million, boosting the estimated offering price to $30 to $32 a share, from $14 to $16 previously. The issue is due to be priced Wednesday and make its Nasdaq debut on Thursday.
``But it's going to be a hot deal because it's a consumer-friendly name, and I think most investors, whether they're retail or institutional, have some awareness of the fact that Internet wireless devices are going to become ubiquitous over the next few years,' Slinn said.
It's looks like easy money for the few lucky institutional investors and wealthy individuals who can get some of the 23 million shares, or 4 percent stake, Palm is selling. There is talk of the stock hitting $300 on its first day. Lucky, too, are strategic partners America Online Inc. (NYSE:AOL - news), cell phone maker Nokia Oyj (NYSE:NOK - news) and Motorola Inc. (NYSE:MOT - news), which are buying 7.3 million shares in the offering at the IPO price.
Of course, 3Com and Palm will benefit. 3Com stock on Tuesday closed 18-15-16 at 98 amid the enthusiasm for the IPO, after reaching a record high 100 earlier in the session.
LIVING UNDER A ROCK
But for those who may want to own Palm stock over the long haul, there may be better investments, money managers and analysts said. They cited quickly shifting technologies and an expected explosion of ever-smarter mobile phones that could perform many of the same functions as the popular Palm device.
Although such phones are still two to five years away, it's nearly a foregone conclusion that myriad next-generation wireless devices will crop up, analysts said. Nokia, for one, has said it expects one billion cellular phones in use around the world by 2003, an increase from the current 500 million.
``If anybody feels that the Palm is going to be the dominant force for any extended period of time, he has really been living under a rock,' said David Menlow, president of IPOfinancial.com, which tracks IPOs. ``The technology really has a shelf life.'
To date, Palm has been very successful. Sales at Palm, which shares corporate headquarters with its parent in Santa Clara, Calif., rose 76 percent to $259 million in the period ended Nov. 26 from the year-ago quarter, while earnings climbed 58 percent to $12.9 million. Sales at 3Com, meanwhile, fell 4.3 percent to $1.47 billion during the same period.
Palm has also managed to be profitable selling devices in the cutthroat consumer electronics business. Even so, the company said in filings with the Securities and Exchange Commission that it aims to shift revenue growth more to licensing its Palm operating system to mobile phone makers and others, and nurturing what it calls the ``Palm economy' -- accessories, services and additional software programs that can be used with the Palm.
LONG IN THE TOOTH
Still, some observers have noted that the Palm operating system may be getting a bit long in the tooth. It has a so-called 16-bit operating system, while rivals such as Britain's Psion Plc's (quote from Yahoo! UK & Ireland: PON.L) EPOC operating system for personal digital assistants, or PDAs, is a 32-bit-based platform. That can process more information faster than a 16-bit system.
Even though Palm commands anywhere from 75 percent to 88 percent of the market for PDA operating systems, it hasn't been enough to stave off encroachment of competitors.
By contrast, the domination of Microsoft Corp.'s (NasdaqNM:MSFT - news) Windows operating system for personal computers has been strong enough -- to date -- to ward off competitors, allowing it near-guaranteed revenue for software upgrades.
But that's not necessarily true with Palm, money manager Slinn said.
``They haven't penetrated enough of the potential market (which includes smart phones and the rest of the PDA world) well enough yet to go out and say we're going to try to preach the Palm gospel,' Slinn said. ``There's plenty of room for a better operating system to come along, like maybe a Linux-based operating system for handhelds.'
To be sure, others are more sanguine. Barry Jaruzelski, a vice president at management consulting firm Booz-Allen & Hamilton, said Palm signed a number of important deals with the likes of America Online and Nokia in a bid to spread the Palm operating system.
And, he added, the ultimate wireless PDA is either years away or may never come to pass -- and that would benefit Palm. ``There will be merged devices, but you don't want your PDA to do everything your notebook computer would do because, for one, you don't want a keyboard that small,' Jaruzelski said.
``Having a very simple interface that can potentially be migrated across these (device) families obviously plays to Palm's advantages,' he said.
Perhaps, but the concern among some is that the Palm interface is just that -- too simple and unable to keep pace as the worlds of high-tech, telecommunications, the Web and even entertainment all collide at near-Internet speed.>> |
