Sly:
Here's the write up I shot to the editors at the NYT, WSJ and Barrons this week. Hope you and any other new visitors to the thread find it a useful synopsis. If you're going to get in, get in Monday or you'll regret missing the train, which actually began picking up a head of steam when the S-1/A was filed 1/28/00.
Good luck, David T.
How come the media (press and televison) haven't yet featured the unfolding COMS-PALM story?? This one has it all -- a red hot IPO coming up the week of 2/28/00, a potential COMS resurgence as new wired and wireless high speed business and consumer networks are deployed, how to buy as much of the PALM IPO as you want at more or less the present offering price of $14-16, and the human interest angle of long suffering COMS shareholders, after 2-3 years of pain, finally getting a big pay day.
A. First, the PALM IPO:
1) Scheduled for the week of 2/28/00 (per Goldman spokesperson), major league underwriters Goldman Sachs, Morgan Stanley Dean Witter, & Merrill Lynch. CEO is Carl Yankowski, who from 11/93 through 1/98 was President and COO of Sony Electronics.
2) Total post IPO shares outstanding will be 570 million, at a present offering price of $14 to $16. At $15/share, market cap will be about $8.55 billion. With FY 2000 sales expected to be around $1 billion ($437 million first 6 months), Goldman et al are allocating a wireless P/S multiple similar to QCOM, NOK, ERICY to the PALM offering.
3) The underwriters have restricted the initial public offering to only 23 million shares, about 4.3%, well below the original 20% contemplated in the preliminary S-1 filed late last year. This will almost certainly result in opening trades of at least $30, and make for some volatile trading, at least in the first few days after the IPO. There's an over allotment of 3,450,000 for the underwriters if they want it (which would raise the total number of shares outstanding to 573,450,000
4) AOL (5,333,333), NOK (5,333,333) and MOT (4,333,334) are buying into this IPO to the tune of 15 million shares total at the IPO price, or about $225 million.
5) Since its acquisition by USRX in 1996, PALM has been growing like gangbusters. PALM had revenues of $7 million in 1996, $114 million in 1997, $272 million in 1998, $564 million in 1999, $435 million for the first 6 months of FY 2000, and should reach $1 billion for FY 2000 (FY's end 5/31). Gross margins on PALM hardware devices have been consistently around 44%, and despite significant marketing and R&D expenses associated with new product introductions roughly every 6 months, PALM is generating pre-tax operating profits of 8 to 10% of revenue.
6) As of 12/31/99, 5.5 million PALM units have been sold, and there are 33,000 registered third party application developers for the PALM OS platform. Per IDC, PALM had 68% market share of the handheld market in 1998, and the market is expected to grow to 14 million units by 2003. At the present market share of 68% and an ASP of about $250, that would translate into about $2.4 billion in hardware sales alone. This growth has occurred in the face of strenuous efforts by MSFT and its partners to push Windows CE devices. Clearly, users prefer the elegance and simplicity of the PALM platform to a scaled down version of Windows.
7) PALM has strategic alliances with Nokia (joint development of a new pen-based mobile phone platform to integrate wireless phone, data and PIM functions based on the PALM platform), Sony (joint development and licensing agreement for new consumer electronic products), Sun Microsystems (integrate Java into the Palm platform), AOL (wireless mobile AOL service on the PALM platform), Motorola (license the PALM OS for new wireless products) and IBM (develop and deploy PALM and IBM products and services in the enterprise market). Moving into the enterprise markets and generating higher margin revenues from licensing and royalties for the PALM OS will drive business expansion, revenues and profits. Other PALM licensees include Symbol Technologies (bar code technology), Qualcomm, Handspring and others.
So we have an IPO selling a product that already has 68% market share, $1 billion/year in sales, 44% gross margin, is already profitable, growing like crazy in the portable, wireless, network/internet markets, with heavy weight partners, corporate investors and underwriters. This is one IPO that will fly.
B. Second, what about the underlying business of the COMS parent, that has been pretty stagnant for the last several years as COMS has struggled to digest the USRX acquisition and generate new products and businesses without getting flattened by the CSCO gorilla? And what about the long suffering COMS shareholders?
1) From an all time high of $81 3/8 on 12/10/96, COMS shares slid into the mid 20's in the first quarter of 1997 as INTC got into COMS core network business, the COMS buyout of USRX was announced, and the introduction of 56K modems was slowed by the industry battle over standards. Prices of one of COMS leading products, network interface cards (NIC's) fell to commodity levels before COMS market share stabilized. Prices of modems, the USRX mainstay, also fell dramatically.
2) COMS share price recovered to a high of $59 11/16 on 7/16/97 as investors gave the USRX acquisition a grudging OK. Then the Asian crisis in October 1997, together with the revelation that USRX was loaded to the rafters with unsold modems, crashed the stock again. The stock struggled back to almost $50 by the end of 1999, only to fall back to the $20's upon disappointing earnings and a slow growth prediction by the company as it revamped its strategy to focus on market segments with more growth possibilities.
3) Now, after a painful couple of years, COMS networking business is finally showing some signs of life. Integration of management systems and tightening of inventory controls have resulted in a leaner, more efficient operation. Despite the zero to slow revenue growth, COMS basic business (sans PALM) has been generating revenues of over $5 billion/year as well as a healthy bottom line cash flow. Cash and securities have risen to about $3 billion, or over $8 per COMS share, book value is about $10/share, cash flow from earnings about $3.2/share, and there is no debt. The company has been funding R&D for new product lines at a rate of $600 million/year over the past few years, and as a result, has new potential high growth products in LAN telephony, cable/DSL modems, wireless network access, home and small business networks, and VoIP. For the first time in several years, in the FY 2000 Q2, sales of modems showed a 15% sequential increase as sales of cable and DSL modems began to pick up - a market that is just at the beginning of its high growth stage (plus, every cable modem requires a NIC, another COMS product).
4) So what is the basic COMS business worth? Even assigning a paltry 2X revenues or a P/E of about 25 on (COMS minus PALM) earnings, you get around $27-30/share for COMS (network industry average P/E is around 82, CSCO at $130 is selling at around 27X revenues and a P/E of well over 100). Add in the $8/share of cash on hand, and COMS at a minimum is worth around $35/share. Small wonder that there were takeover rumors last year, which will probably surface again once the PALM business is divested. And even without a takeover, COMS could be trading (sans PALM) in the $40 to $50 range by year end if its network business picks up.
C. Third and finally, the payoff for long suffering COMS shareholders::
1) The only shining light in the gloom has been the performance of PALM, which had been bought by USRX in 1996 for a paltry $44 million. Like Phoenix from the ashes, PALM has arisen from the wreckage of the USRX acquisition to bring salvation to COMS shareholders.
2) The mere announcement of the PALM spin off was enough for investors to bid up COMS shares from 30 in late November 1999 to around 45 by December. Unfortunately, the preliminary S-1 for the spin off filed on 12/13/00 gave few details about the number of shares to be issued, COMS holding after the IPO, or the offering price. Speculation was rife in the press and the internet chat rooms about the valuation to be placed on PALM by Goldman et al (numbers from $4 billion to $8 billion were discussed), and COMS stock price was volatile as a result, trading in a range of $40 to $50+.
3) The S-1/A filed on 1/28/00 answered these questions. COMS winds up holding 532 million shares of PALM, or about 93.3% of the total (92.8% if the over allotment is exercised). These will be distributed to COMS shareholders 6 months after the IPO, i.e. late August 2000.
4) COMS also gets a cash dividend of $50 million, plus 50% of all proceeds of the IPO in excess of $620 million. The IPO proceeds will be around $620 million at the present offering price of $15/share, but if the IPO gets re-priced, COMS gets an additional cash windfall.
5) With 349 million COMS shares outstanding, COMS shareholders will ultimately receive 1.52 PALM shares for each COMS share owned in August 2000. At the present $14 to $16 offering price, that translates into $21 to $24 per COMS share, even without any increase in PALM's price between the IPO and August.
6) Add that to the roughly $35/share valuation of COMS sans PALM from above, and you arrive at a present valuation for COMS of $56 to $59. Small wonder that, once they had digested the 313 page S-1/A and found nothing but sound fundamentals, high historical and potential growth, great news, and major league partners, investors and underwriters, investors have again bid up the shares of COMS to around $60+, a 100% gain in only 2 months (outpacing even CSCO over the same time period).
7) Now that people have got the 1.5:1 ratio in their heads, if the IPO gets re-priced in the next few weeks (certainly possible), you'll again see a sharp upward move in COMS at the rate of $1.5 for every $1 hike in the offering price. Plus on IPO day, if PALM opens up significantly above the IPO price of $15 (almost certain), watch COMS get towed along for a while at the 1.5:1 ratio. It's those two possibilities that will push COMS higher in the next few weeks, even without a re-pricing of the IPO.
8) So, do you want to buy a piece of the PALM IPO now at the present offering price of around $15? Don't waste time asking your broker. With the razor thin public float of only 23 million shares (26,450,000 if the over allotment is used), if you get an allocation of 100 PALM shares, you'll be lucky. Plus, you'll have to pay whatever the final IPO offering price is, whereas right now you can get it for the equivalent of $15/share.
9) Instead, buy some COMS. This provides the reasonable security of the underlying COMS at about $35/share, plus the PALM at around $15/share. Come IPO day or August 2000 (whichever suits your style), you get to cash in, as do all the faithful COMS holders who have stuck with COMS through thick and thin. Plus you have the added carrot that COMS sans PALM will probably be a take over candidate again after PALM has been divested.
So there's the story guys. Do I own COMS? Sure, I have a bundle, but like many tech stock investors I also have a bundle of CSCO, INTC, LU, AAPL, JDSU, NOK, QCOM, TWX and others plus a sprinkling of Internet stocks. In any event, COMS/PALM will do its thing over the next few weeks with or without the press or CNBC giving it any significant coverage.
I just find it odd that the media hasn't picked up on the fact that the smarter investors (both individual and institutional) and traders (who didn't previously own COMS and wouldn't otherwise even give it a look) have been snapping up COMS shares all the way too the present $60+ as the only way to get into the PALM IPO at the something close to the IPO offering price.
Note: Data and information taken from the PALM S-1/A registration statement filed 1/28/00, the 10-Q's filed by COMS for Q1 and Q2 of FY 2000, and the 10-K for FY 1999. |
