Palm ready to roll at $38 a share

The buzz around an IPO has never been more deafening
Written by Larry Dignan, Contributor

Palm priced shares of its initial public offering at $38 (£23) a share, which is above its increased price range of $30 to $32 (£18 to £19). Palm will trade later on today.

The buzz around the Palm IPO has been deafening. The maker of the Palm Pilot handheld computer device raised the projected price range for its IPO to $30 to $32 (£18 to £19) per share from $14 to $16 (£8 to £9) a share on Monday. The IPO will bring the company $874m (£541m).

Shares of parent 3Com have also soared as the Palm IPO gets ready for lift-off. After the IPO, 3Com will own about 93 percent of Palm. It then plans to distribute its Palm shares to 3Com shareholders within six months. Palm plans to offer 23 million shares. Goldman Sachs is the lead underwriter, with Morgan Stanley, Merrill Lynch and Robertson Stephens assisting.

"Palm has been one of the most widely anticipated IPOs since it first came into the system," said David Menlow, analyst with IPOfinancial.com.

The company boasts a whopping market share of more than 60 percent and has sold over 5.5 million Palm devices worldwide.

For the six months ending 26 November, the company reported a profit of $22.5m (£13.9m) on sales of $435m (£269m). For the year ending 28 May, Palm reported a profit of $29.6m (£18.3m) on sales of $563.5m (£349m). In fact, Palm has been 3Com's fastest growing businesses.

3Com has been on a tear in recent weeks, despite a lackluster second quarter. 3Com shares closed 1999 at 47.

The success of Palm hasn't gone unnoticed by other wireless players. America Online (AOL), Motorola and Nokia will buy Palm shares in a private placement that will occur concurrently with the IPO. "It's going to be a hot deal because it's a consumer-friendly name, and I think most investors, whether they're retail or institutional, have some awareness of the fact that Internet wireless devices are going to become ubiquitous over the next few years," said money manager Richard Slinn from Levensohn Capital Management.

Although Palm is ensured a strong market debut, analysts -- both publicly and privately -- have expressed doubts about the company. One noted that Palm's gadgets just aren't as cool as upcoming offerings from Ericsson and other wireless players.

In its regulatory filings, Palm said it has to keep pumping out new products and technology to stay ahead of the pack. "The life cycle of our handheld devices is generally 12 to 18 months or less," the company said.

Palm also cited competition from a host of wireless devices. If smartphones supplant the Palm, the company's revenue could suffer, it said. And European wireless service providers are already planning to give a free smartphones away with all the Palm functionality included.

"The long-term success will be dictated by direct competition," said Menlow. "A lot of companies are nipping at Palm's heels." The company said it primarily competes with Casio, Compaq, Hewlett-Packard, Psion (quote: PON), Sharp and Palm platform licensees, such as TRG and Handspring. On the operating system side of the business, Palm competes with Microsoft's Windows CE software. The operating system could become one of Palm's biggest revenue streams as it licenses its software to others.

Other competitors for Palm include keyboard-based devices, sub-notebook computers, smartphones and two-way pagers, the company said. Palm said licensees like Nokia, Sony and Qualcomm use its platform in devices such as mobile phones or other similar products that can compete indirectly with its handheld devices.

Palm said it is working to diversify its revenue stream through licensing and expansion of its Web sites, but 99 percent of Palm's revenue comes from handheld sales. And that transition isn't going to be easy.

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