3Com to spin off Palm unit

3Com Corp. (Nasdaq: COMS) said Monday it will spin off its Palm Computing unit as an independent company.

3Com said the new structure will "enable 3Com and Palm to build on their market leadership positions in networking and handheld computing."

The Palm division, which makes the Palm Pilot handheld organizer, is one of 3Com's growth businesses. In 3Com's latest quarter, Palm sales amounted to about 10 percent of revenue.

3Com's Palm spin-off: Good move?

Analysts have been pushing for a spin-off for months as 3Com has struggled amid growing competition. With 1999 sales of $570 million, the Palm unit was among 3Com's fastest growing businesses. 3Com beat estimates in its latest quarter, but concerns about revenue growth persist.

3Com reports fiscal first quarter earnings Sept. 21. The First Call consensus estimate is 24 cents a share.

IPO on deck

3Com said it will launch an initial public offering (IPO) for its Palm Computing subsidiary early next year, and will spin off the balance of the shares of the new publicly traded company to 3Com shareholders. 3Com shareholders will ultimately own shares in both companies.

In an IPO, 3Com would sell up to 20 percent of Palm to the public and retain the rest.

"Creating the industry's first independent, publicly-traded handheld computing company is excellent news for our customers, partners and employees," said Chief Executive Officer Eric Benhamou on a conference call. "The formation of two distinct companies, each with greater flexibility, agility and focus, will create more value for our shareholders."

Benhamou said a CEO and financial chief will be named for the Palm unit. The split also gives both Palm and 3Com "greater management bandwidth."

Need to focus

The Palm unit and 3Com will need to focus. 3Com is under fire in its networking business from competitors such as Cisco Systems (Nasdaq: CSCO) in the corporate world and Intel Corp. (Nasdaq: INTC) in the small business/consumer space.

And the Palm unit faces pressure from Windows CE-based competitors and upstarts such as Handspring Inc., which was founded by the Palm Pilot creators. Handspring's Visor is poised to press the Palm Pilot on speed and cost.

3Com was most likely hearing the footsteps from Handspring, which was a likely candidate to go public and make a big splash. Benhamou, however, downplayed the Handspring competition and said, "We welcome Handspring to the Palm economy."

Benhamou said the spin-off timing was right because Palm had critical mass, a large market to address and there were emerging opportunities for 3Com's networking business.

3Com said the Palm unit will focus on the following markets: handheld operating system licensing, enterprise computing, wireline and wireless Internet services, portal sites and Palm-branded devices. 3Com and Handspring will be among Palm's first customers by licensing the Palm operating system.

Officials said the goal was to make the Palm OS as "pervasive as possible," according to officials.

Barksdale on board

Although the Palm unit hasn't officially filed with the Securities and Exchange Commission, 3Com did add that James L. Barksdale, managing partner of the Barksdale Group and former CEO of Netscape, and Gordon A. Campbell, president and chairman of Techfarm, Inc., will be on Palm's board of directors. Campbell and Barksdale are currently on the 3Com board.