Palm's IPO soars, but parent 3Com slips

Leading handheld computer faces competition from a host of wireless devices
Written by Larry Dignan, Contributor

The Palm initial public offering lived up to its advance billing on Thursday, opening at 145 after pricing at $38 a share.

At 11.37am EST, shares were trading at 136 1/2. The IPO raised $874m (£533m).

Although Palm's market debut was impressive, it wasn't unexpected. Palm priced 23 million shares well above its increased price range of $30 to $32 a share. The original price range was $14 to $16 a share.

Shares of parent 3Com have also soared as the Palm IPO got ready for lift-off. After the IPO, 3Com will own about 93 percent of Palm. 3Com plans to distribute its Palm shares to 3Com shareholders within six months. 3Com was down 17 3/4 to 91 3/4.

Goldman Sachs was the lead underwriter for the Palm IPO 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 on sales of $435m. For the year ending 28 May, Palm reported a profit of $29.6m on sales of $563.5m. In fact, Palm has been 3Com's fastest growing businesses.

3Com has been on a tear in recent weeks despite a lacklustre second quarter. 3Com shares closed 1999 at 47. You could call the run-up in 2000 the Palm premium as investors use 3Com as a proxy for shares of Palm.

The success of Palm hasn't gone unnoticed by other wireless players. America Online, 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 at San Francisco-based Levensohn Capital Management.

Although Palm is ensured a strong market debut, analysts both publicly and privately have expressed doubts about the company.

One analyst 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 smart phones supplant the Palm, the company's revenue could suffer, the company said. And European wireless service providers are already planning to give a free smart phone 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 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 fly under the radar. These devices include keyboard-based devices, sub-notebook computers, smart phones and two-way pagers, the company said. Palm said licensees such as Nokia, Sony or 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.

Reuters contributed to this report.

What do you think? Tell the Mailroom. And read what others have said.

See techTrader for more technology investment news, plus quotes and research.

See Inter@ctive Investor for US tech investor news.

Editorial standards