March 3, 2000

Tech IPO

Palm Soars as 3Com Unit
Makes Its Trading Debut

By SCOTT THURM
Staff Reporter of THE WALL STREET JOURNAL

Talk about leaving the nest.

Shares of Palm Inc. soared on their first day of trading, giving the dominant maker of handheld organizers a market value nearly twice that of parent 3Com Corp., which still owns 94% of Palm.

Palm shares, which were priced at $38 each, traded as high as $165 before settling at $95.0625 in 4 p.m. trading on the Nasdaq Stock Market Thursday. That gave Palm, of Santa Clara, Calif., a market value of $53.4 billion. More than 37.9 million Palm shares changed hands, more than 1 1/2 trades for each of the 23 million shares Palm sold. The lead underwriters were Goldman Sachs Group Inc. and Morgan Stanley Dean Witter & Co.

Meanwhile, shares of 3Com, which had risen in recent weeks in anticipation of Palm's IPO, fell $22.3125, or 21%, to $81.8125 in 4 p.m. Nasdaq trading. That left 3Com, which plans to distribute to shareholders its Palm stake in six to nine months, with a value of almost $28 billion.

The disparate trading illustrated the premium investors place on hot new technologies perceived as related to the Internet, even to the exclusion of older technologies also related to the Internet. Indeed, 3Com, whose primary business is making computer-networking equipment, arguably is more involved in the Internet than Palm, which offers wireless Internet access on one of its models.

But Palm is a well-known brand whose devices control about 70% of the market for handheld organizers. Palm's software is beginning to win a place on new devices to access the Internet, such as cell phones, but the company faces stiff competition in that arena from Microsoft Corp., and others. America Online Inc., Motorola Inc. and Nokia Corp. each took small stakes in Palm in private placements at the same time as the IPO.

Palm sales are growing 65% a year, on a pace to top $1 billion in the fiscal year ending in May. For the six months ended Nov. 26, Palm reported net income of $22.5 million, or four cents a share, on revenue of $435 million.

"Palm is a must-own type name; there's nothing like it in the marketplace," said Brian Barish, president of Cambiar Investors Inc., Denver, which holds slightly more than three million 3Com shares. Cambiar began building its 3Com stake in the fall, around the time 3Com announced plans to spin off Palm.

Investors and analysts said arbitragers likely will swoop in to narrow the gap between the values of Palm and 3Com, but probably not at least until next week, when Palm shares can be borrowed and sold short. (In a short sale, a trader sells borrowed shares in hopes of replacing them at a lower cost, thereby pocketing the difference.) Moreover, the relatively small float of Palm shares -- approximately 4% of the company is now in public hands -- means that the gap is unlikely to be closed before 3Com completes the spinoff.

It isn't unprecedented for a spinoff company to be valued at more than a parent that still owns a substantial stake. Communications firm IXnet Inc. was valued at more than twice as much as IPC Communications Inc. in mid-February, even as IPC owned 73% of IXnet. Both companies have since agreed to be acquired by Global Crossing Ltd.

But Thursday's trading also highlights questions about the future of 3Com without Palm. Revenues in 3Com's other businesses are stagnant, and the company already warned Wall Street to expect disappointing earnings in the quarter that ended last week.

In an interview Thursday, 3Com Chief Executive Eric Benhamou said the company has an "exciting" future built around new products such as high-speed modems, home networking and gear for wireless-phone networks. But he pledged that "the transformation of 3Com is not over" and said he hopes to use 3Com's newly buoyant stock to bolster the firm through investments and acquisitions.

That troubles investors such as Mr. Barish, who think Mr. Benhamou would essentially be using Palm's currency to help 3Com. "He has no business doing deals using somebody else's currency," Mr. Barish said. "We all know why the stock of 3Com is up. It has nothing to do with the business of 3Com."

But Mr. Benhamou said he isn't bothered by these complaints. "Our business is not on hold waiting for the spinoff," he said, adding that 3Com stock is "available for 3Com to use as it sees fit."

Write to Scott Thurm at scott.thurm@wsj.com¹

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