For companies eager to spin off a hot technology
business, the high-flying Palm Inc. stock sale by parent 3Com Corp.
offers a juicy financial incentive but also a cautionary lesson
In the eagerly awaited stock debut, 3Com severed its Palm unit
from the rest of the company and sold 23 million shares last
Thursday. By week's end, investors had bestowed a stunning market
value of $45 billion on the new offspring nearly double the value
of Palm's far-larger and more established parent, whose stock
Never mind that 3Com still owns 94 percent of the new company,
the No. 1 seller of hand-held electronic organizers. Or that Palm's
sales last year were about one-sixth of 3Com's revenues, which were
derived mostly from networking equipment.
The yawning difference in market capitalizations points out
uncertainty over 3Com's future, especially since the company plans
to spin off the remainder of Palm to shareholders in a few months
and operate independently.
And Palm, although it remains at sky high levels, fell
significantly from its peak Thursday, adding questions about what
its true valuation should be.
To be sure, a small group of privileged investors profited from
buying Palm stock in the IPO and then quickly selling it, as it
soared from an offering price of $38 to a peak of $165 early on its
first day of trading Thursday.
But many who bought the stock on the open market fared poorly as
it fell steadily later Thursday and Friday, ending the week at
"I'd say the majority of people were hurt ... in that," said
Art Bonnel, manager of the $360 million U.S. Global Investors
Bonnel Growth Fund, which focuses on mid-sized companies. "When
there is a little bit of confusion out there, stocks tend to sell
Palm, despite fast-growing sales, is making a risky change in
its business model. Its IPO is intended to help fund a new strategy
of licensing out its operating system software and letting other
manufacturers build hand-held organizers using that system. Within
two years, analysts project the company's revenue from selling the
Palm gadgets to be surpassed by revenue from licensing fees from
the operating system.
The ride in 3Com's stock was as rocky as Palm's. These shares
stagnated for months, then rose sharply in the weeks ahead of the
Palm offering as investors saw an alternative way of getting Palm
shares when they are spun off from 3Com later this year.
However, when Palm went public Thursday, 3Com's stock sunk 21
percent, falling $23.31 1/4 to $81.81 1/4. It recovered a bit on Friday
to $83.06 1/4.
Analysts said the seesaw debut in part reflected a harsh glare
by investors on 3Com's remaining business. While sales of Palm
organizers are soaring more than 50 percent a year, 3Com's overall
sales including Palm dropped 4 percent in the latest quarter
amid fierce competition from rival makers of networking equipment.
Investors, moreover, are uncertain whether 3Com will complete
the distribution of Palm stock to 3Com shareholders, which depends
on a ruling from the Internal Revenue Service that the shares will
be tax-free. For its part, 3Com says it expects to distribute the
Palm stake in six to nine months.
"I think people are just thinking that the spinoff is not a
done deal," said Andrew Whittaker, an analyst at Lehman Brothers
A similar scenario, but with a lot more shareholders at stake,
could play out next month when AT&T; Corp. spins off its wireless
telecommunications division, funding an initiative to bring
telephone and Internet service into homes without wires.
The IPO could raise up to $10 billion. The wireless business is
one of AT&T;'s fastest growing, and perhaps its most promising.
Like 3Com, AT&T;'s remaining business particularly its dominant
long-distance telephone service are slower growing.
In a pattern similar to 3Com, AT&T; shares started rising late
last month as investors saw a way to eventually snag shares of the
Yet for all the similarities with 3Com's deal, chances appear
far slimmer that an AT&T; spinoff will exceed the parent's market
value, now at a staggering $173 billion.
"Investors are going to be as fickle as they've ever been. But
with AT&T; you just have a lot more market cap to push around,"
said Steve Frenkel, a market strategist with the Ladenburg Thalmann
& Co. investment firm.
Still, being free of AT&T;'s management is sure to help the
wireless offspring, Frenkel said.
"Getting out from AT&T;'s imperious management is worth a
premium to any small company," he said.