Palm IPO price doubles as demand grows
The handheld specialist, which 3Com will spin off in an initial public offering this week, more than doubles its projected selling price amid rising demand for the shares.
Palm will seek to sell 23 million shares at an initial asking price of $30 to $32, according to documents filed with the Securities and Exchange Commission today. Previously, Palm was expected to sell its shares for $14 to $16.
The number of shares sold by the company could reach 26.5 million. As a result, the IPO could raise more than $819 million for 3Com, according to the SEC filing.
With the spin-off of Palm, 3Com becomes the latest tech giant to tap into the red-hot market for IPOs. Microsoft, Oracle and Hewlett-Packard have made similar moves in recent months.
3Com fell $1.63 in regular trading today. The increase in the expected price for Palm shares was reported after the markets had closed, sending 3Com shares climbing by about $6.
Despite today's doubling in the expected offering price, it could climb even higher, say analysts.
Palm is an established brand name and is rapidly landing alliances with computing giants such as Sun Microsystems that aim to make Palm handheld computers as common as cell phones and PCs.
And unlike many other tech companies that have gone public recently, Palm is profitable. The company reported net income of $29.6 million in fiscal 1999, which ended in May, and enjoys gross margins of 44 percent, relatively high for a company that earns most of its money through sales of consumer hardware.
Revenues have also more than doubled each year since fiscal 1997 and show little sign of slowing down. For fiscal 1999, revenues came to $560 million. For the first half of fiscal 2000, sales hit $435 million while net income came to $22.5 million.
Since 1995, 5.5 million Palm devices have been sold.
"You may see another price range increase...I have a feeling in my heart that maybe they may raise it again to around $36 or $40," said Jeff Hirschkorn, senior analyst with IPO.com.
He added that he would not be surprised to see an opening price of $300 a share. "They are building up to a crescendo," Hirschkorn said.
The largest beneficiary of the IPO will no doubt be 3Com itself. The networking equipment maker will own 94 percent of Palm's stock after the IPO.
If the initial asking price stays in the low $30 range, Palm will have a market capitalization of about $17 billion, almost equal to Apple Computer. If Palm's stock jumps into the hundreds, the company will have a market capitalization that rivals some industrial giants.
Other beneficiaries of a strong IPO will be America Online, Motorola and Nokia. Each company has pledged to buy about 2 million shares each at the initial asking price.
Although Palm's future looks strong, it will face significant challenges. The company said Palm organizers are still largely sold as consumer products, resulting in cyclical downturns in sales in the first and third calendar quarters of the year. Nearly all revenue comes from sale of handhelds, although licensing fees are expected to increase, according to the documents filed with the SEC.
The company also faces significant competition, especially as it moves into the wireless communication market.
Managing growth will also prove tricky. In December 1997, the company had 220 employees. By the end of last year, that number had grown to 652.
With the spin-off of Palm, 3Com becomes the latest of several large and established tech companies to cash in on the red-hot IPO market.
Oracle spun off Liberate, a maker of software for set-top boxes, last July. November marked two spin-offs: online travel site Expedia from Microsoft and Agilent from Hewlett-Packard.
Expedia shares went public at $14 and are currently trading at about $21.50, giving it a market value of about $800 million. Microsoft holds an 86 percent stake in Expedia.
Liberate shares, which were split 2 for 1 in January, are now trading at about $97, giving it a market value of $8.4 billion. Oracle owns 48 percent of Liberate.
Agilent shares are trading at about $101, giving it a market capitalization of $46 billion. HP owns about 85 percent of Agilent's stock but plans to divest its stake this year.