Palm's IPO soars while 3Com wilts

Palm closed up 57 1/16, or 150 percent, to 95 1/16 in its initial public offering Thursday. But its parent company, 3Com, watched its shares fall 21 percent.

Palm shares opened at 145 after pricing at $38 a share.

Its shares moved up to a high of 165 before dropping precipitously in late trading.

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 (Nasdaq: COMS) have also soared as the Palm IPO gets 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. However, 3Com shares closed off 22 5/16, or 21 percent, to 81 13/16 Thursday.

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.

Dominant market position

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 Nov. 26, the company reported a profit of $22.5 million on sales of $435 million. For the year ending May 28, Palm reported a profit of $29.6 million on sales of $563.5 million.

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. 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 (NYSE: AOL), Motorola (NYSE: MOT) 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.

Long-term buy?

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 (Nasdaq: ERICY) 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.

Stiff competition

"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 (NYSE: CPQ), Hewlett-Packard (NYSE: HWP), Psion, Sharp and Palm platform licensees such as TRG and Handspring. On the operating system side of the business, Palm competes with Microsoft Corp.'s (Nasdaq: MSFT) 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 (NYSE: NOK), Sony (NYSE: SNE) or Qualcomm (Nasdaq: QCOM) 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.