Without Palm, 3Com could be a merger candidate

The possibility of a merger with a telephone equipment maker--such as Lucent Technologies or Sweden's Ericsson--has Wall Street buzzing again, and many analysts say today's move to spin off its Palm unit makes 3Com a more attractive acquisition candidate.

3Com's financial woes have fueled the market speculation. After a lackluster quarter in March, 3Com has struggled to define its business strategy and has spent the last six months reorganizing its corporate structure.

This spring, 3Com chief executive Eric Benhamou said the firm's PalmPilot line was central to the company's future as it moved away from slow-growth businesses like analog modems into emerging opportunities like digital subscriber line (DSL) and cable modems, wireless technologies, and home networking.

3Com felt its PalmPilot line could ignite sales of 3Com's networking equipment. "This is what the soul of the company is about," Benhamou said at the time.

Today's decision seems to mark a serious shift from 3Com's earlier strategy.

But 3Com executives disagree, saying the PalmPilot is still central to 3Com's business. The networking firm claims that it doesn't need to keep the Palm technology under its roof, Benhamou said in an interview with CNET News.com today.

"I've always said the handheld computing devices was central to our networking vision. It stimulates wireless connections," he said. "Ownership of a handheld and control of the business is not essential. The Palm can grow faster [on its own] than as a part of 3Com."

Operating 3Com's networking business and the Palm unit as separate entities will give both sections the resources and the focus they need to thrive, he said.

Confused focus
One of the main reasons the company chose to spin off the Palm unit is to avoid confusion as to what 3Com's core business really is, executives said. Benhamou stressed that its networking customers should be confident that networking is the company's main focus--especially as it faces more competition from Cisco Systems, Intel, and others.

"Many people started to introduce 3Com as the maker of Palm and it's only 10 percent of what we do," Benhamou said. "We want to make sure 3Com stands for the networking brand. And not that there's no shadow of a doubt that we're committed to the business."

Cahners In-Stat analyst Mike Wolf said the move is good for both Palm and 3Com's networking business.

"The competition is increasing in the palm-sized personal digital assistant space and this lets them better compete," Wolf said. "3Com's history has been as a networking company. This lets them focus a laser beam on the convergence of the voice and data network."

3Com executives said the company had been discussing for the past year whether to spin off the Palm unit. With today's move, 3Com is finally doing what many analysts said they should have done as far back as 1997 when it acquired the Palm technology through its merger with US Robotics. Wall Street in fact has pushed for independence for Palm as a way to help raise 3Com's shareholder value.

Benhamou said now is the right time for an independent Palm, as the market has grown sufficiently--the firm claims some 5 million Palm users worldwide. "The handheld market was embryonic a year ago. Today, we see other opportunities that are bigger and more lucrative," he said.

Networking push
Benhamou said 3Com can focus on its networking strategy, particularly in the emerging Internet telephony market, where it's competing with Cisco Systems and Nortel Networks to build equipment that will combine data and voice on one Internet-based network.

It is this convergence push that has fueled 3Com takeover rumors. In the past year, Nortel purchased networking firm Bay Networks and Lucent bought networking firm Ascend Communications to further their own networking portfolios.

Analysts have speculated that other traditional phone networking players like Ericsson, Nokia, or Siemens would want 3Com's data networking equipment to get them into the new telecom markets.

Ridding itself of the Palm device makes 3Com more appealing to potential suitors, said Cahners In-Stat Group analyst Mike Wolf. "This makes them more attractive. The Palm devices are tangential to the networking business. If you're Lucent, the Palm doesn't make sense for your company."