3Com falls after Palm frenzy

Shares of 3Com took a nosedive today following the successful spin-off of its popular Palm Computing division. By market close at 1 p.m. PST, 3Com's shares dropped $22.31, or 21 percent, to $81.81 as 100 million shares exchanged hands.

The spin-off is part of 3Com's plans to revitalize its struggling networking business. 3Com executives say giving Palm its independence will allow the company to focus its attention in the highly competitive market that includes heavyweight competitors, such as Cisco Systems and Nortel Networks, and upstart firms, like Extreme Networks.

Now comes the hard part. Analysts have been positive about 3Com's strategy, but they say the company faces challenges ahead as it is left with a stagnant networking business that has shown few signs of significant growth in recent quarters.

"Most of the value in 3Com's shares is in the potential of Palm," said Gruntal & Co. analyst Michael Davies. "If you look at the remainder of 3Com, half of its revenue is derived from networking cards and modems, and that's a single-digit growth business. It's going to be much more of a challenge without Palm."

The Palm unit made up 13 percent of 3Com's overall revenue last quarter, while sales of its networking systems products were down 12 percent sequentially.

3Com has struggled over the past year as it refocused its business on more profitable networking areas. The company decided to move away from network adapter cards and analog modems to newer technology areas such as Internet telephony, home and wireless networking, and high-speed cable and digital subscriber line (DSL) modems.

3Com recently announced a strategy to improve its sales of Internet-based equipment to telecommunications firms and Internet service providers, while providing businesses with the equipment they need to connect their customers, partners and employees to the Web.

Company executives in December said 3Com's new focus on emerging markets is starting to make a dent in the company's bottom line. Sales in the new markets were not enough to stave off last quarter's flat revenue growth, but 3Com executives expect a boost in revenue numbers as product sales in emerging areas continue to grow.

"They have the technology to address the new markets, and they have the talent, distribution base and brand recognition," Davies said. "But the market is so competitive, it's going to be a challenge to achieve stellar growth. Cisco continues to dominate and 3Com faces new challengers--start-ups like Alteon Websystems, Foundry Networks and Cabletron's plans to break up into four new companies."

Analyst Esmeralda Silva, of International Data Corp., thinks 3Com's strategy will work, especially with the company's new Internet-based thrust.

"There's a lot of opportunity for them in relatively new markets," she said. "They are picking certain markets that are clearly growing beyond the single-digit rate."

Despite today's spin-off, 3Com's fortunes will be tied with Palm for about another six months. 3Com initially retains a 93 percent stake in the company, then in about six months, 3Com will distribute Palm shares to 3Com investors. Because of that, analysts expect interest in 3Com's shares to remain strong. In fact, the company's stock, which was mired in the $27 range, has tripled in value since 3Com announced the spin-off plans in September.

One of Palm's manufacturers today saw its share price rise as the handheld device maker debuted.

Flextronics, one of two Palm device manufacturers, saw its shares increase $4.50, or about 7 percent, to $65 in late afternoon trading. Analysts said it's hard to determine how much Palm played a role, or whether the jump was largely due to a strategic alliance with Chatham Technologies to develop an improved supply chain.

A number of Palm's suppliers, however, failed to get a boost today--despite their client lining its pockets with $874 million in IPO funding. Integrated circuit suppliers Anadigics, Analog Devices, Linear Technology and Micro Linear were all down today in late trading.

Anadigics fell $2.75, or about 3 percent, to $92.25; Analog Devices declined $3.69, or about 2 percent, to $157.81; Linear inched down $4.13, or about 4 percent, to $98; and Micro Linear eased slightly by 13 cents, about 1 percent, to $8.88.

News.com's Dawn Kawamoto contributed to this report.