"3Com Hands Palm Unit Its Freedom, Plans IPO"
Date: 9/14/99
Author: Michael Lyster
Com Corp. is giving its Palm Computing unit a hand out of the company nest.
By January, the Santa Clara, Calif., networking products company says it will publicly sell up to 20% of Palm, maker of the top-selling hand-held device of the same name. And by June, the company plans to offer the remaining Palm shares to 3Com shareholders.
''Palm has reached critical mass,'' said Eric Benhamou, chairman and chief executive of 3Com, at a press conference in New York to reveal the spinoff. ''The timing is right.''
The move caps Palm's rise from a side business within modem maker U.S. Robotics Corp. to 3Com's star player. Palm, which joined 3Com in 1997 after that company bought U.S. Robotics, made up 10% of 3Com's $5.77 billion in sales for the fiscal year ended May 28. Palm's revenue surged 116% to $570 million for that fiscal year compared with the year earlier. Even with that rise, 3Com's sales overall rose a mere 6%.
For 3Com, the move lets the company focus on its core business. 3Com makes hubs, routers, modems and other behind-the-scenes gear that moves data over corporate networks and the Internet. But 3Com has suffered of late against bigger rival Cisco Systems Inc.
''3Com will renew its commitment to the networking business,'' Benhamou said. ''The 3Com brand will be enhanced by virtue of a clear association with networking.''
Opening Palm's Doors
In June, 3Com warned that its revenue in the quarter ended last month would fall below analyst expectations because of slumping modem and network card sales. The company is expected to release results next week. Analysts surveyed by First Call Corp. project earnings of 24 cents a share, flat with the year-ago period.
Stepping out of 3Com's shadow stands to open new doors for Palm, says unit President Alan Kessler. Being part of 3Com may have kept some rival companies from working with Palm, he says.
''There might be some companies that may have been apprehensive about partnering with us. Think of a Lucent or Cisco,'' he said. ''Being an independent company could really help us in that regard.''
The Palm, also known as a personal digital assistant, is the leading hand-held computing device. More than 5 million people use the gadget to track addresses, appointments and other personal data. Increasingly, companies are blessing the Palm as an addition to their computer networks. It's gotten easier to transfer data from the Palm to desktop PCs.
Palm products make up 42% of all hand-held devices sold worldwide, according to Framingham, Mass.-based market tracker International Data Corp. In the U.S., the company's share is even higher.
In the past year, Palm has withstood an attack by Microsoft Corp. and makers of hand-held devices based on its Windows CE software. Other rivals include Britain's Psion PLC , and Italy's Olivetti SpA , maker of the DaVinci hand-held. In July, 3Com sued Olivetti, alleging copyright infringement on the Palm.
Analysts say they expected word of the Palm spinoff. 3Com's stock has risen in recent days on rumors of a proposed move. It closed Monday up 1 5/8 to 28 7/8.
''This is exactly what they needed to do,'' said Rob Enderle, an analyst with market tracker Giga Information Group. ''There isn't one analyst who believed Palm didn't need to be spun off to be successful.''
Any 3Com Suitors?
Palm's Kessler says he isn't sure yet how much Palm will raise in a public offering. How the market will view Palm also is unclear.
The unit is known as much for the operating software that runs the Palm as the devices themselves. 3Com licenses the software to makers of other hand-held devices such as Symbol Technologies Inc. and Mountain View, Calif.-based Handspring Inc. , a company started by Palm developers Donna Dubinsky and Jeff Hawkins. 3Com also runs a Web site focusing on the Palm.
''We are in fact three different businesses,'' Kessler said, speaking of hardware, software and the Web.
While Kessler plans to stay on as Palm's president, 3Com is looking for a chief executive to head the unit. Company officials say they expect to have someone on board by the fall, when 3Com plans to file documents with federal regulators to take Palm public. Judy Bruner, 3Com's vice president and controller, plans to join Palm as its chief financial officer.
3Com did name two board members for an independent Palm: James Barksdale, former chief executive of America Online Inc.'s Netscape Communications unit, and Gordon Campbell, chairman of Techfarm Inc. , a Sunnyvale, Calif., firm that works with technology start-ups.
As a new company, Palm plans to target consumers, business and education users, Kessler says. He hopes to land Palm software in wireless telephones and gadgets for kids. Acquisitions are a possibility, he says.
The proposed spinoff of Palm raises the question of whether 3Com itself is an acquisition target. The company has long been the subject of takeover rumors, with potential suitors ranging from Lucent Technologies Inc. to Germany's Siemens AG .
3Com's Benhamou downplayed the notion that the company is in play. ''While this does enhance the clarity and focus of both companies, it does not increase the likelihood of a transaction,'' he said.
CIBC Oppenheimer analyst Marty Pyykkonen doubts that anyone's waiting to pounce on 3Com. The company's lagging modem and network card business is a hurdle to any sale, he says.
''If you were serious about selling the entire company, you'd have to split it once again,'' he said.
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