Beleaguered 3Com to Spin Off Its Palm Computing Division
Bowing to investor pressure, networking company 3Com Corp. on Monday said it would sell shares in its fast-growing Palm Computing division to the public and eventually spin it off--a move that would create an independent leader in the burgeoning market for hand-held computers.
Beleaguered by battles with networking leader Cisco Systems and slowing modem and network card businesses, 3Com has seen its shares drop by nearly two-thirds since 1996.
Wall Street has been pressing 3Com Chief Executive Eric Benhamou to unleash Palm, which makes the best-selling hand-held organizers but accounts for only 10% of Santa Clara, Calif.-based 3Com’s revenue.
“Last year, Palm didn’t have services, it didn’t have a real licensing program and it didn’t have 5 million users,” Benhamou said in explaining the delay. “From this point forward, Palm Computing will thrive much better.”
Shares of 3Com rose $1.63 to $28.88 on Nasdaq after the announcement.
“Evidently, the message has gotten through at 3Com. Their focus has been too broadly spread,” said Sanford C. Bernstein & Co. analyst Paul Sagawa. “They have been too risky for the value investor and too slow-growth for the growth investor.”
In fact, 3Com’s misfortunes have made it the subject of takeover speculation.
“If they want an exit strategy, Palm’s separation is Part A,” said CIBC analyst Martin Pyykkonen. “If you were to split it again, selling off network-interface cards and modems, it would become more attractive.”
The announcement comes one day before the Palm’s developers, now at start-up Handspring Inc., formally unveil Palm’s most serious rival to date, called Visor. Benhamou called the timing a “happy coincidence.”
But analysts said it appears 3Com wanted to make the announcement while it could still claim that Palm, which has 73% of the hand-held organizer market, is the clear leader.
“If they waited any longer, it would have gotten worse,” said Rob Enderle of Giga Information Group. “A number of us indicated that if Handspring executes well, they will win the core of the Palm market.”
Handspring founders Donna Dubinsky and Jeff Hawkins licensed the Palm operating system for the Visor, which is cheaper and more easily expandable than the Palm III, 3Com’s most popular machine.
3Com executives said they plan to compete with Visor and other Palm-like products in both price and features. Palm organizers are priced as low as $199 and provide easily accessible address books, calendars and other features.
Yet the debut of a competing product marks a turning point for 3Com. Currently, the majority of Palm’s $570 million in annual revenue comes from the sale of Palm organizers. But Benhamou said licensing and other sources will increase, leading to a proliferation of devices made by other companies.
“Our expectation is that the device portion, over the next two to three years, will become the minority in revenue and profits,” he said.
Palm also has relationships with Oracle, Sybase and Sun Microsystems to provide software that allows Palm users to access corporate data. Benhamou said he expected much of Palm’s growth to come from corporate use and wireless connections.
Palm’s independence as a company should help it attract and keep more talented leadership, said Lehman Bros. analyst Tim Luke.
After Dubinsky and Hawkins left, the company appointed Robin Abrams, who left in June after less than seven months. Current President Alan Kessler wasn’t touted Monday as a leading candidate for the post-IPO Palm.
Benhamou said a chief executive for the new company will probably be chosen in the next few weeks.
