Palm drops after blockbuster first day

The handheld computer maker priced its shares at $38 yesterday, more than double the price that was initially expected. Palm was down about $14.81, or about 16 percent, to $80.25 at the 1 p.m. PST close of regular trading today. It closed up 150 percent at $95.06 yesterday.

Analysts said investors may be trying to evaluate the difference in value betwen Palm and its parent company, 3Com.

"There's some recognition of the pricing discrepancy between 3Com and Palm and the feeling that that spread is going to narrow over time," ABN Amro analyst Jonathan Ross told Bloomberg today.

Today, shares in Palm's parent company 3Com rose $1.25, or nearly 2 percent, to $83.06 on heavy volume of 38.9 million shares.

3Com's stock reached as much as $117 yesterday as bids for Palm topped $160.

Based on yesterday's price per share, Palm has a market capitalization of about $53 billion. By comparison, Apple Computer has a market value of $20 billion, Compaq Computer is worth $43 billion and Dell Computer is valued at $113 billion. 3Com has a market capitalization of $28.6 billion, based on today's trading price.

Palm's lead in the handheld market, coupled with its profitable performance and position in the hot wireless sector, has driven investor interest in the offering. Palm products account for roughly three out of every four handheld devices sold, according to market research information.

The company is looking forward to the age of wireless devices and Internet-enabled cell phones, and has inked a number of deals to put its software on these devices. Palm devices are expected to eventually be eclipsed in popularity by these wireless products, but analysts and investors have generally been reassured by the company's long-term view and strategic positioning.

"We didn't expect it to be this enthusiastic," said Carl Yankowski, Palm's chief executive yesterday. "We're delighted that people are excited and have a lot of confidence in the company and in the management team.

"We're neither arrogant, nor complacent about what we have to do," he added.

ABN Amro initiated coverage of Palm, rating it a "buy" and setting a target price of $90 per share. In expectation of the IPO, parent company 3Com was the most heavily traded company on the Nasdaq yesterday.

As with any high-profile offering, however, Palm may not maintain any lofty heights achieved yesterday, analysts say.

"The question is, where does it go from here?" said Richard Peterson, an IPO analyst with Thomson Financial Securities Data, comparing Palm to VA Linux, a company which was up 600 percent on its first day but is yesterday was trading 50 percent lower.

"Palm is probably in a better position because they have sales and earnings and a big corporate backer," Peterson said. "VA Linux was a stand-alone. TheGlobe.com was a stand-alone."

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The handheld device company, trading under the ticker "PALM," raised $874 million through the IPO, excluding underwriting fees and other costs. That makes it the third-largest technology IPO ever.

Palm will use the cash infusion to expand its facilities and staff, fund research and development efforts and replace the corporate infrastructure that parent company 3Com provided, Yankowski said. The company does not have any immediate plans for acquisitions, but Yankowski did not rule it out.

"There is nothing in the works right now," he said. "That I can comment on."

Palm will now be completely independent from 3Com, which will nonetheless be the handheld maker's largest shareholder, with more than 90 percent of the company. These shares will later likely be dispersed as a dividend.

"We'll be going through a transitional period," Yankowski said, explaining that Palm would be buying some infrastructure-related services from 3Com, with the networking company licensing some of the handheld maker's technology. "They will be a good and close partner--plus, they're located virtually down the street."

Palm also may raise another $131 million--putting the value of the IPO at more than $1 billion--if it sells an additional 3.45 million shares to the underwriters to cover over-allotments.

Motorola purchased 1.7 million Palm shares yesterday at the initial $38 price. America Online and Nokia each purchased 2.1 million shares, according to Palm.

Earlier this week, Palm essentially doubled its pricing range to $30 to $32 a share from its initial range of $14 to $16 a share. That placed Palm among a small group of companies whose IPOs garnered enough interest to take such a bold step. VA Linux, the top first-day gainer of all time, also had doubled its range as it prepared to debut. VA's initial gain, however, has subsided.

Palm's debut may be tempered somewhat by a security patent infringement lawsuit filed by E-Pass Technologies. Analysts, however, question the timing of the suit and merits of the allegations.

More problematic to some analysts are the logistics of the company's transition from hardware manufacturer to software and technology licensing firm. Although Palm can rely on guaranteed long-term revenues from licensing fees, hardware sales provide higher up-front profits. In addition, Palm's role as hardware manufacturer may present some conflicts with its licensees, including start-up Handspring and Sony, which is expected to release its own Palm device later this year.

"Palm sees itself as the head church, with many satellite churches," said Richard Doherty of The Envisioneering Group, explaining that the success of the licensees will contribute to Palm's overall success.

After yesterday's sale, 3Com will hold a 94.8 percent stake in Palm, which it is planning to later divest. The networking company plans to give its shareholders the Palm stock as a dividend.

3Com again hit a record high Wednesday, up over 10 points to 115. The company was most heavily traded issue in early trading. The shares have quadrupled since it announced Palm's IPO plans last September.

"Palm's one of the real drivers of 3Com stock," said IPO.com's Hirschcorn. "The PalmPilot is a big part of 3Com."

News.com's Michael Kanellos contributed to this report.