Palm IPO: 3Com’s morning after, or “Do you know the way to San Jose?”

  • Written By: C. McNulty
  • Published: March 17 2000


Event Summary

(Thursday, March 2, 2000 - Reuters) Shares of Palm Inc. skyrocketed the day after its highly anticipated initial public offering, giving Palm a stock market value of US$53.4B.

The stock soared from its IPO price of $38 to open at $150 and trade as high as $165 on Nasdaq. The stock ended up 57-1/16 at 95-1/16, making it the third-biggest percentage gainer and the fourth most active issue on the Nasdaq.

Late Wednesday, 3Com, which makes products and software for data networking, sold 23 million shares, or 4 percent, of its Palm unit at $38 each - well above the expected range of $30 to $32. Initially, the stock was expected to be priced at $14 to $16 a share.

At the stock's closing price, Palm had a market capitalization that was larger than that of its parent company, 3Com.

Market Impact

3Com's most recent SEC filing says it all. From Q2 1999 to Q2 2000:

  • Sales of network systems products (switches, hubs, routers, etc.) decreased 12%

  • Sales personal connectivity products (NICs, modems, etc.) decreased 14%

  • Sales of handheld computing products (Palm) increased 77%

Clearly, Palm has been pumping up 3Com revenues.

3Com is more than aware of the trends - its stated plans are to focus on the following growth markets as it completes its Palm spin-off: voice over IP (VoIP), LAN telephony, broadband access, wireless access, and home networking.

3Com's largest rivals are not standing still. Lucent Technologies (NYSE:LU) has also announced plans to spin-off its' own, more mature PBX and LAN networking businesses. Lucent will concentrate on high growth areas, including optical networking, Internet infrastructure, wireless, semiconductors, and consulting services, according to Lucent Technologies Chairman and CEO Richard McGinn.

Canadian telecom giant Nortel Networks (NYSE:NT) is moving in similar directions. Nortel recently announced plans to spend $260 million and add 3,400 people to its burgeoning fiber optic networking business. Nortel is also active in CRM (Customer Relation Management) and call center software, with its plan to acquire San Jose-based front office software maker Clarify Inc. (NASDAQ:CLFY).

Finally Cisco Systems, Inc. (NASDAQ:CSCO) dominates the market for network hardware such as routers and switches. It's also moving aggressively toward the LAN hub and switch (hello, 3Com!) market, and home users. Furthermore, Cisco has over US$10B cash to help finance any potential acquisitions.

3Com, with a market cap of "only" US$28B is dwarfed by the market capitalizations of Lucent (US$229B), Cisco (US$454B), and Nortel (US$161B). It can't afford to buy any of them at present. As 3Com heads for newer markets, it's going to find two extremely deep pockets - Lucent and Nortel - headed there as well. At the same time, Lucent is clearly eschewing 3Com's traditional networking market, while Cisco is targeting LAN's and homes.

3Com's stock will churn as the market digests its distribution of its 94% share of Palm stock. Obviously, it will add greatly to its own US$950M cash reserves, but 3Com's rivals dwarf even Palm's US$54B market cap. Hmm. Well, Cisco's San Jose headquarters are only about five miles away from Santa Clara. And Cisco has the reputation for being extremely good at mergers.

We expect a 70% likelihood that 3Com and Cisco enter into merger or acquisition discussions during the next twelve months, and at least a 40% likelihood that they establish a joint venture, minority purchase, or merger.

User Recommendations

Users planning hub and switch purchases during 2000 need not regard a 3Com purchase decision as automatic. At a minimum, the increased market pressures can be leveraged for more favorable purchase terms. 3Com's technology, distribution, price points, and name recognition remain undiluted. However, 3Com customers should not be averse to looking at competing vendors such as those documented above.

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