News World: 3Com Plans Palm Computing IPO

3Com Plans Palm Computing IPO

By Dave Marino-Nachison (TMF Braden)
September 13, 1999

In a move that would create the first handheld computing pure-play for investors, networking products maker 3Com (Nasdaq: COMS) said today it intends to make its Palm Computing subsidiary an independent, publicly traded company sometime next year.

"Creating the industry's first independent, publicly traded handheld computing company is a significant milestone, reflecting both the current success and the future potential of our Palm business," said 3Com Chairman and CEO Eric Benhamou. 3Com is planning an IPO for Palm early next year; it will follow it up with a spin-off of the rest of the company's stock to 3Com shareholders.

This doesn't do much to make things better at 3Com overall -- handheld product sales, though they more than doubled between fiscal 1998 and 1999 to $570 million, still account for just 10% of the company's sales. The company's shares have had a difficult run in recent years, with its core networking line finding the competition from Rule Maker Cisco (Nasdaq: CSCO) and others rough trade. For a recent Foolish take on the company at large, click here.

But these are exciting times at Palm. Its seventh-generation PalmPilot is the industry standard, quickly joining the cellular phone as a must-have digital accessory for a public apparently increasingly busy in spite of all our wonderful time-saving technologies.

A little background: Handheld computing was slow to take off as companies struggled to design interfaces that consumers would accept. Apple's (Nasdaq: AAPL) Newton, for example, was one of several much-ballyhooed failures. But the success of the Palm line -- and the influx of competition -- has served as an indicator that this is a market with tons of potential.

In fact, investors might remember reading last week that Handspring, the group that invented the PalmPilot before leaving 3Com, is preparing a product it hopes will take back some of their progeny's market share. The Handspring product, reportedly called "Visor," is said to be a significant improvement technologically and could represent Palm's sternest test yet. According to Reuters, it's slated for an online launch soon, with a retail unveiling next year.

Still, as the clear leader in an exciting, emerging industry, the backing of a large and growing network of accessory and software makers, and more than 4 million units in the marketplace, Palm promises to provide an exciting opportunity for investors -- particularly once freed from 3Com's not particularly inspiring networking business.

Palm hopes its Pilot can continue to generate additional opportunities powered in large part by the inventiveness of its partners. "Palm is uniquely positioned to aggressively drive a number of emerging strategic market segments," the company's statement said, "including handheld operating system licensing, enterprise computing solutions, wireline and wireless Internet services, portal sites and Palm-branded devices."

Interestingly, 3Com's shares were active late last week not only on the expectation of today's news but reportedly on the regeneration of ongoing rumors that the company was the subject of takeover interest from telecom equipment makers such as Lucent (NYSE: LU).

One factor investors should remember when considering Palm is that as a consumer product it will require higher marketing expenses than most of 3Com's products. In fact, since 3Com didn't break out expenses by division in its most-recent annual report, there are a lot of aspects of this business it would be nice to have more information about.

With that in mind, there's probably little reason for investors to jump into 3Com before at least waiting to see Palm's prospectus and getting better acquainted with the business.

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