3Com pushes Palm out of the nest

CEO Eric Benhamou says a Palm spinoff could help both companies.

Sometimes it's better to just break up. 3Com Corp. on Monday announced plans to spin off its Palm Computing division, because it feels the two can do more apart than together.

Palm Computing will continue to pursue its core handheld device business, as well as license its operating system. At the same time it will develop new products and services for businesses, wireless, computer telephony and portal sites, according to 3Com (Nasdaq:COMS).

3Com hopes Palm Computing will grow its "Palm economy," the combined business of Palm Computing and all of its partners, past the multibillion-dollar level.

"The reason why the timing is most appropriate now is threefold," said 3Com CEO Eric Benhamou. "First, Palm (Computing) has reached critical mass. In the last quarter, Palm accounted for 10 percent of our revenues."

The second reason, he said, "is the emergence of (several) new segments in the handheld computing market, the licensing segment, the services segment and corporate segment are all happening now. The third reason is that we believe today we are in the best position to maximize the value for our shareholders," he added.

Microsoft relationship favored
Meanwhile, Palm Computing will stay out of 3Com's hair -- and vice versa. Take Microsoft Corp. (Nasdaq:MSFT), for example, whose WinCE operating system competes with Palm. The split will allow 3Com's networking division to have a good relationship with the Redmond, Wash., software giant.

"It is more of a convenience to have a clear alliance choice offered to each company," said Benhamou.

Palm Computing, which has about 600 employees, will file with the Securities and Exchange Commission this fall and expects to launch an initial public offering next January, he said.

The independent Palm will be able to focus on doing what it does best.

"It is our goal to make the licensing of palm OS as pervasive as possible and to extend it to other devices, including entertainment and education markets," said Janice Roberts, a senior vice president of business development at 3Com and a former Palm Computing interim president.

Roberts said, in addition, that a number of new Palm devices are in the works, including ones with fully integrated wireless and other devices with wireless modems that would work on services besides Palm Computing's own service, called Palm.net.

More partners coming
Palm Computing will also form additional partnerships with wireless service providers, "in particular to enable services in Europe," she said.

Despite the news, it's been business as usual for Palm Computing partners.

"From my perspective, we're fine with this. If it results in more money being invested and more quickly developed new hardware platforms, it will be a good thing," said Rob Goldman, vice president of marketing for Symbol Technologies Inc.

Symbol, along with IBM (NYSE:IBM), is one of the first few Palm OS licensees. The company markets the SPT 1700, a ruggedized version of the device with local area wireless support for use in vertical industries.

"We all here think it's a good thing," said Dave Rensin, chief technology officer of Riverbed Technologies Inc., the developer of a synchronization technology for Palm OS handhelds used by businesses. "The more money that can be applied to the Palm Computing effort ... it means (Palm) can build more products faster. You can grow the platform."

Still, 3Com and Palm Computing will maintain a close relationship. 3Com will be Palm's majority shareholder, holding some 80 percent of Palm stock. 3Com will also become a Palm OS licensee and will be the sole manufacturer and supplier of certain Palm devices, Benhamou said.

3Com and Palm Computing will put together a management team for Palm over the next several months. Alan Kessler will remain president of the operation. Meanwhile, a CEO search is on.

Seeking more licensees
With some 5 million Palm-branded devices in the market, 3Com says it isn't worried about competitors, even those such as Handspring Inc., who have licensed Palm OS for use in their own devices.

"We'd like to enable many more (companies like) Handspring to continue the growth of this emerging market," Benhamou said.

Palm Computing employs some 600 people at its Santa Clara, Calif., headquarters, in Seattle and also in Europe, Roberts said.