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Technology Stocks : 3Com Corporation (COMS) -- Ignore unavailable to you. Want to Upgrade?

To: shrpblnd who wrote (43233)	5/13/2000 10:57:00 AM
From: David E. Taylor	Respond to of 45548

SharpBlond: Both the possible trading strategies and the potential stock price dynamics are intriguing. The present $4-$5 valuation of COMS (based on yesterday's close) is clearly going to increase between now and 7/7, the day COMSV/PALMV start trading. But will that happen through PALM declining further or COMS increasing? Except for those investors who just want PALM and can't be bothered with all this dancing around, there's still no compelling reason to buy PALM directly vs. buying COMS to get it. And there won't be for 8 weeks until 7/7 arrives and the arb difference disappears. We can mark 7/7 as "Liberation Day" when PALM will be completely free to start finding its own level, and we may see it begin to do that before 7/7 as the arb gap narrows. What might that level be? Pessimists would say around $15, citing the original IPO price and the press about PALM's competition from Psion, Handspring, Pocket PC, cell phones, etc. Optimists would say at least $40, citing the final IPO price of $38 and the slew of analysts targets of $70 - $80. The more I think about this, the more I'm inclined to think that we may see some further decline in PALM (maybe to as low as $20) over the next couple of weeks due to further arb activity, though my broker tells me that the present 12.5 million short position makes the shares near impossible to borrow. OTOH, PALM has dropped $7 since the announcement -- arb shorting or just people selling PALM to buy COMS, who knows? But as the arb gap narrows as we approach 7/7, IMO there will be (1) a shift from buying COMS (to get PALM) to buying PALM directly, plus (2) PALM short covering as the arbs begin to close out their positions. That should push PALM back up again until it finds its true market level, taking COMS with it since the arb gap will be narrowing. My guess (or expectation) is that COMS will be at least in the high 50's, maybe low 60's by 7/7. And there's the possibility that the two effects will reinforce each other and cause PALM to spike up, and COMS to spike up also, so we may see something like the pre-IPO run into the 70's or $80's. If that happens, it'll be dampened by the experience of the IPO, where few people took full advantage of the spike to 100-120 to get out. If this happens a second time, people will be more inclined to take the profits and wait for the dust to settle. That reasoning has persuaded me to open a small July call position in COMS - small right now because I could lose it all, but a position that I'll ratchet up if COMS/PALM take off. Plus I'm thinking of buying some August PALM calls since the premiums are miniscule. I agree with your last point, but only if the market valuation of COMS sans PALM gets to a reasonable level (say $20 -$25) by 7/7, and COMSV starts trading there. Then I'll be inclined to sell the COMSV portion of my current COMS position and maybe even short some additional COMSV, on the assumption that the selling of COMSV will overwhelm 3Com's apparent intent to prop up the price. It'll be interesting to see how they handle this, they may just let the price slump before stepping in rather than trying to support it from the outset. Sorry for the long ramble, sometimes it helps to write it down. Thoughts anyone? David T.