Hands Down, Palm IPO Shaping Up as Year’s Most Anticipated
The most anticipated initial public offering so far this year is due to hit the market this week, in a deal that combines three of the hottest current buzz-terms on Wall Street: hand-held computing, wireless and Internet.
That’s the consensus on Palm Inc., maker of the PalmPilot electronic organizers. This week, parent 3Com Corp., the Santa Clara, Calif.-based maker of computer-networking equipment, is expected to offer shares of Palm in a first-time stock sale.
Shares of 3Com have almost tripled since it unveiled plans last fall for the IPO, which will be followed by a full spinoff of the rest of 3Com’s Palm stake by September.
There has been massive hype about the $345-million deal, with some analysts projecting a first-day price gain of 100% or more.
3Com is expected to sell 23 million shares, or just 7% of the company, at $14 to $16 each. Led by Goldman, Sachs & Co., the underwriting team also includes Morgan Stanley Dean Witter and Merrill Lynch.
The stock is expected to trade under the symbol PALM on Nasdaq.
“It could be one of the biggest hits,” said Tom Taulli of Internet.com, a Westport, Conn., data company. “This is a solid company. It has both revenues and profits and a top-notch underwriting team.”
More than 5.5 million Palm organizers have been sold since the PalmPilot’s introduction in 1996, giving the company a nearly 70% share of the U.S. hand-held computer market and nearly 50% worldwide, according to researcher International Data Corp.
For the latest reported quarter, which ended in August, revenue rose to $176.5 million from $116 million for the same time the previous year, while profit rose to $9.6 million from $8 million.
While the Palm organizer models are selling well, analysts are most enthusiastic about the company’s move into the wireless Internet-access arena with the Palm VII.
“Before, it was just an organizer, a cool one,” Taulli said. “Now, with the Palm VII and Internet access, this company has a recurring revenue stream.”
That’s because the company expects to continue licensing its Palm platform, in the hope that it will be the leading operating system in the rapidly converging markets of hand-held computing devices, mobile phones and hand-held entertainment devices. Nokia and Sony have already agreed to license the Palm system.
With Palm, investors will clearly be betting on the future of wireless systems in general. There were 3.5 million mobile data subscribers as of Dec. 31, and by 2004 there are expected to be 21.5 million, according to the Strategist Group, a Washington data tracker.
“And already, 20% of all mobile phone users have one of these PDA, or personal digital assistant, type of devices [such as a PalmPilot],” said Elliott Hamilton, a senior vice president specializing in wireless communications at the Strategist Group. “We expect these people will want to have a wireless component to the PDA.”
Indeed, many expect the popularity of hand-held devices to explode in the near future, especially as they transform into devices that can serve as cell phones, hand-held computers, two-way pagers and MP3 music players all in one.
Still, Palm has plenty of competitors--including Jeff Hawkins and Donna Dubinsky, who know Palm well.
An engineer, Hawkins invented the PalmPilot in 1994, using pieces of wood from his garage to create a prototype he carried around in his shirt pocket, pretending it was a real electronic device, as he worked out the bugs. Dubinsky, more of a deal-maker, co-founded the start-up, then called Palm Computing, with Hawkins.
When the two had trouble getting venture capitalists in Silicon Valley to invest in their firm, they tapped U.S. Robotics to take an ownership stake.
Palm became a division of 3Com when the latter bought out U.S. Robotics in 1996, and the co-founders left in 1998 to form Mountain View, Calif.-based Handspring, aiming to design a cheaper, faster alternative to the PalmPilot. With backing from blue-chip venture capital company Kleiner Perkins Caufield & Byers, they created Visor, a product that is similar to the Palm, but cheaper.
Established tech giants are also targeting the wireless Internet market en masse, of course.
“There is going to continue to be a lot of competition in this area and it remains to be seen how Palm will handle that,” said Gail Bronson, a Silicon Valley venture strategist and analyst with IPO Monitor, a Calabasas data firm. “Hand-held devices are the hottest onramp onto the Internet and an untapped retail market.”
Last week, in a move some interpreted as pre-IPO hype, Palm introduced its first model with a color screen, betting that customers will pay more for the option.
But Palm isn’t the first electronic organizer with a color screen.
Competitors in this market, such as Casio Computer Co., Hewlett-Packard Co. and Compaq Computer Corp., make similar devices based on Microsoft Corp.’s Windows CE software, a rival system to the Palm wireless operating system.
Indeed, although Palm is an early leader, it must continue to develop products that attract market attention, analysts say. That’s not easy: The Palm VII, for example, took two years to develop, but the company says such products usually have a life span of only 12 to 18 months before new products can make them obsolete.
Whatever concerns investors may have long-term, however, they aren’t likely to dampen enthusiasm for the IPO, analysts say.
One indicator of demand for Palm stock is the recent share price performance of 3Com: The stock has risen more than 70% this year, to $80.69 as of Friday, on enthusiasm for Palm.
Some investors are buying 3Com because the bulk of Palm shares will be distributed to 3Com shareholders later this year in a spinoff. Since small investors often get shut out of high-demand IPOs, owning 3Com is a roundabout way to guarantee eventually getting some Palm shares.
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In the venture capital arena last week, East/West Capital, a $250-million Los Angeles fund, co-led a $16-million second-round investment in Fandom Inc., a Santa Monica-based Web site for science fiction news and products.
The company, formed in July 1999, has about 100 workers. Wasserstein Adelson Ventures was the co-investor.
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Debora Vrana covers investment banking and the securities industry for The Times. She can be reached at debora.vrana@latimes.com or at Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
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The Palm Factor
Shares of 3Com, which languished most of last year, took off in the fall after the networking company announced plans to spin off Palm, its prized wireless unit. Weekly closes and latest on Nasdaq: Friday: $80.69
Source: Bridge News
