May 9, 2000
IN THE MONEY: Now Mkt Thinks 3Com
Non-Palm Ops Have Value
By MICHAEL RAPOPORT
A Dow Jones Newswires Column
NEW YORK -- 3Com Corp. (COMS) shareholders, rejoice! Finally, the
market is acknowledging that 3Com will actually retain some value once it
finishes spinning off its Palm Inc. (PALM) unit.
Not much value, to be sure - only about $4 a share, at least as of right
now. But heck, you've got to start somewhere. And it beats a valuation of
less than zero - which is essentially what the market has applied to 3Com's
non-Palm operations for more than two months.
Finally, one of the more striking market anomalies of recent months
appears to be correcting itself, with a little help from 3Com. Ever since
3Com took Palm public in early March, the 94% stake it retained in Palm
has been given a higher value by the market than the entirety of 3Com
itself. At the end of Palm's first day of trading, 3Com had a market
capitalization of about $28 billion, but its stake in Palm was worth about
$50.6 billion - meaning, essentially, that the market thought the rest of
3Com, profit-making businesses with more than $4.8 billion in revenue
over the last year, was worth negative $22.6 billion.
That situation has persisted ever since, though the gap has narrowed -
3Com stock has tumbled since early March, but Palm stock has fallen
even more, and has been below its $38 IPO price for nearly a month. The
gap seemed set to reverse itself a week ago, when 3Com's stake in Palm
was worth "only" $440 million more than all of 3Com, but then it started
widening again, and was about $1.83 billion as of Monday's close.
Late Monday, however, 3Com set July 27 as the date for its planned
spinoff to shareholders of its remaining Palm stake. That, combined with a
stock buyback and changes to employee options that 3Com hopes will
bolster its share price, seems to have shaken investors into finally realizing
that this bizarre situation couldn't and shouldn't continue.
So, on Tuesday, the valuations turned around so fast investors might have
gotten whiplash. 3Com stock was at 47 7/8, up 4 3/16, while Palm was at
28 7/8, down 3 3/8. That means 3Com's market cap is now about $16.8
billion and its share in Palm is worth about $15.4 billion - a difference of
$1.4 billion, this time in the right direction. With about 350.8 million 3Com
shares outstanding, that works out to about $4 a share for the non-Palm
operations.
That $4 figure is a pretty safe bet to grow as the distribution date
approaches, considering that the non-Palm operations have provided
3Com with most of its revenues and much more of its profits than has
Palm.
Over the nine months ending just before the IPO, Palm had $707.4 million
in revenues - about 16% of 3Com's $4.28 billion in total revenues over the
same period. The handheld computing segment of 3Com, corresponding to
Palm, had income of $77 million over those nine months, compared with
$416.6 million for 3Com's other two segments, network systems and
personal connectivity.
"We think that as we get closer to the distribution, and clearly immediately
following the distribution, the market will be forced to put a valuation on
3Com," Brian Johnson, a 3Com spokesman, said last week. "We think at
that point, the valuation of 3Com will come shining through." (A Palm
spokesman couldn't be reached for comment.)
Part of the reason the 3Com-Palm valuation gap has persisted for so long
is that arbitrageurs, who normally would take advantage of such a gap by
buying 3Com stock and shorting Palm, to bring the two valuations back
into alignment, haven't been completely free to do so. With only 23 million
of Palm's 564 million shares available for public trading, it's been harder for
them to borrow shares to short, and thus to drive Palm's price lower. Not
that they don't want to - as of mid-April, Palm had short interest of 12.5
million shares, or a whopping 54% of Palm's public float.
But "now people have a time frame, they have the tax ruling," said one
arbitrageur who didn't want to be identified, referring to an Internal
Revenue Service ruling that the Palm spinoff will be tax-free. That's
spurring Tuesday's movement he said - while arbs are still finding shares
"virtually impossible" to borrow for shorting purposes, they're using other
strategies to try to profit.
"People are scrambling to set this up," he said.
And so, things have returned to something approaching rationality, at least
in the 3Com-Palm segment of the universe. Of course, in a market this
weird, that might not last long - but it'll do until the next
common-sense-defying market impossibility comes along.
-Michael Rapoport, Dow Jones Newswires, 201-938-5976,
michael.rapoport@dowjones.com
3Com closed Tuesday at 48 3/16, up 4 1/2, or 10.3%, while Palm closed
at 29 1/8, down 3 1/8, or 9.7%. That puts 3Com's market cap at $16.9
billion, compared with a value of $15.49 billion for its stake in Palm - a
difference of $1.41 billion, or a value of about $4.02 per 3Com share
exclusive of Palm's operations.
The 3Com/Palm situation still appears to be a little out of whack, however:
As of its most recent balance sheet, 3Com has nearly $3 billion in cash
alone, or more than $8 a share.
-Michael Rapoport, Dow Jones Newswires, 201-938-5976,
michael.rapoport@dowjones.com |
