Palm IPO Soars, but Is There Still a Way in the Backdoor?
By Cintra Scott

March 2, 2000

LIVING UP TO feverishly high expectations, 3Com's (COMS) Palm (PALM) division exploded onto the market today, tripling at the open and moving to a high of $165 — up 334% from its offering price of $38 a share. It slid back to around $95.06 by the closing bell, but still stood 150% higher.

The deal — which also included the private placement of shares to AOL (AOL), Motorola (MOT) and Nokia (NOK) — was co-managed by Goldman Sachs and Morgan Stanley Dean Witter. Palm offered 23 million shares, or a 4% stake in the company.

Meanwhile, 3Com stock also went wild. The Palm parent opened for trading this morning at $117, but as soon as Palm became available, investors dropped 3Com like an old Filofax. The stock plummeted by $30 — or 26% — within minutes. It was trading 21% lower by market close.

There may be an opportunity here. As we reported earlier this week, 3Com still owns 95% of Palm, which it plans to distribute to its shareholders in about six months. Until that distribution is announced (and a date is set to determine "shareholders of record"), the share prices of Palm and 3Com should be closely linked. But the market reality is that many investors are dumping 3Com and using the proceeds to buy Palm.

Mark Minichiello of research boutique Spin Off Advisors believes 3Com is a good buy as a result. Based on previous spinoffs, Minichiello believes 3Com will give its investors 1.5 shares of Palm for each share of 3Com they hold. (His estimate is based on the ratio of the total number of outstanding 3Com shares to the total number of Palm shares, which is roughly 2:3.) At today's wild prices, buyers of 3Com could get $143 worth of Palm for the bargain price of $82 — and get 3Com's remaining networking and modem businesses for free.

Crazy, huh? The problem is, there's no guarantee Palm will fetch today's $95 price per share six months from now. Furthermore, this is still speculation, since 3Com has not officially announced its distribution policy.

Palm is famous for selling the popular PalmPilot handheld organizers. The latest version, the Palm VII series, allows users to access the Internet without wires. Because Palm may be positioned to lead the wireless, portable-computing world, it is being hailed as a way to buy into the future of a mobile Web. Furthermore, the company is expanding its software business by licensing the rights to use its operating system — Palm OS. The hope is that the Palm OS will become the de facto standard, a la Windows for PCs.

In an unusual move, ABN AMRO's Jonathan Ross initiated coverage of Palm before it even started trading. (ABN AMRO was not involved in the deal's underwriting.) Ross praised Palm's potential in the exploding mobile Internet world, which he thinks will experience faster adoption rates than the wire-bound Internet did. Ross slapped Palm stock with a $90 share-price target, based on its commanding one-third of the $155 billion wireless Web opportunity he foresees.

At $95 per share, Palm carries a $53 billion market cap. That's more than double Apple's (AAPL) $21 billion valuation. Last fiscal year (ended May), Palm earned $29.6 million on revenues of $563.5 million. As of Dec. 31, the company had sold about 5.5 million organizers (an estimated 78% of the market) and signed on some 33,000 independent developers to work with Palm's system. As an independent company, investors are high-fiving Palm like they never did when it was just a unit of 3Com.