3Com spins off Palm Computing

The company said it plans to float an initial public offering of stock in the Palm division by the end of this year or early next year.

3Com will sell 20 percent of the Palm venture's shares in the initial IPO, with 3Com owning the other 80 percent. Within six months, the company will transfer the remaining share stake to 3Com's shareholders, 3Com executives said. Ultimately, 3Com stockholders will own shares in both firms.

Palm Computing had sales of $570 million in fiscal 1999--representing about 10 percent of 3Com's total sales, according to the company.

3Com is the No. 2 maker of networking equipment for corporations and Internet access, as well as the developer of the Palm line of personal digital assistant (PDA) computing devices, following its 1997 merger with U.S. Robotics.

Analyst Mike Wolf of Cahners In-Stat Group said 3Com's decision to spin off its Palm division is a smart one.

"With the stock market valuations today, anything in the emerging media space from Internet to interactive media is doing well. And Palm can get that kind of evaluation," he said.

Though 3Com's Palm business has been extremely successful--the company boasts more than 5 million Palm customers--it was thought by many in the financial community to be tangential to the company's core networking business.

The company's chief executive, Eric Benhamou, told CNET News.com as recently as this spring that 3Com's Palm business had a "central place in the future" of the company due to its success as a business and its future role as a means to create more network connections, thereby increasing sales of the company's network switches.

That view has changed with plans to spin off the Palm unit.

During a press conference today, Benhamou said the spin-off will allow 3Com to focus on networking and give Palm the management team and resources needed for the popular handheld device to thrive.

"We think the announcement today signals the creation of two leaderships focused on separate and complementary businesses [and that is] good news for our shareholders," Benhamou said.

The new Palm spin-off will have its own chief executive, chief financial officer, and a separate executive board. Benhamou said 3Com has identified potential candidates to run the new Palm company and expects to make decisions on that soon.

The new Palm venture will focus on licensing the Palm operating system to more handheld device makers, increasing subscribers to its wireless Internet service for the Palm VII device, and selling the Palm devices in the corporate and education markets. 3Com is looking at licensing the Palm OS to gaming companies, using the technology to create a new game system.

3Com will soon announce more deals with licensees and in the entertainment and education markets, Benhamou said.

"Our goal is to make the licensing of the Palm OS as pervasive as possible, such as in smart phones, but also in the entertainment and education markets," he said.

As for the rest of 3Com, Benhamou said the move today allows the company to focus its efforts to build networking equipment that combines voice and data on a single network, a market that Cisco Systems, Nortel Networks, and others are going after.

The move to spin off 3Com's Palm unit could signal yet another round of merger rumors at the company. A stumbling block for any party interested in 3Com has been the divergent consumer and corporate technology businesses the company has played in with its networking equipment and handheld devices, according to industry observers.

3Com will continue to be a licensee of Palm's technology following the spin-off, according to the company.

As a result, James Barksdale, managing partner in the Barksdale Group and former chief executive at Netscape Communications, will move to Palm's board of directors, along with Gordon Campbell, president and chairman of Techfarm.

3Com's shares rose 1.50 to 28.75 as about 10 million shares exchanged hands by midday.