Bowing to pressure from investors and seeking to concentrate on its core computer-networking business, 3Com Corp. said yesterday that it will spin off its fast-growing Palm Computing unit, which makes the sleek hand-held organizer that has gained cult-like status among busy professionals.
3Com said it will sell a 20 percent stake in Palm in an initial public stock offering in about three months. Shares representing the remaining 80 percent will be given to existing 3Com shareholders, the company said.
The Palm unit has been a sparkling gem within 3Com, whose share value has tumbled more than 50 percent this year because of slowing sales and increased competition from arch rival Cisco Systems Inc. Palm's revenue more than doubled this fiscal year, to $569.9 million, amounting to about 10 percent of 3Com's $5.77 billion in annual sales.
More than 4 million Palm units have been sold since the original "Palm Pilot" was introduced in 1996, giving rise to a whole new business segment--which 3Com has dubbed the "Palm Economy"--in providing software and services for the hand-held devices.
But investors have long felt that 3Com's stock price has not fully reflected the value of the Palm unit. In recent months, with 3Com's share value sagging, they urged 3Com's chief executive, Eric Benhamou, to spin off the division. By making Palm a separate company, investors hope they will be able to more directly benefit from the popularity of Palm devices.
"The investors wanted this," said Scott Miller, an analyst with market research firm Dataquest Inc. in San Jose. "Palm on the open market ought to be worth more than Palm buried within 3Com."
The gunmetal-gray Palm devices, which range in price from $200 to $600, store phone numbers, appointments and to-do lists. Users input information by scrawling on the unit's playing-card-size screen with a small stylus. The devices also run a variety of software written by businesses and hobbyists that enables users to read electronic books, translate foreign languages, search the Bible and assemble expense reports.
3Com acquired Palm in 1997 as part of its purchase of modem giant U.S. Robotics. At the time, 3Com didn't have any grand plans for the Palm unit, which was widely viewed as a manufacturer of geek toys.
But all that changed by the following year. The Palm started becoming a mainstream gadget. The range of features and computing power made it a hit with all sorts of professionals, who began toting Palms in their shirt pockets and zapping electronic business cards to one another with the device's infrared transmitter.
Despite the success, the Palm unit has been in flux since the acquisition. The original founders, Jeff Hawkins and Donna Dubinsky, left last year to start a firm that will develop Palm-based software. 3Com then tapped Robin Abrams, a veteran Apple Computer Inc. and Hewlett-Packard Co. executive, to run the division. Abrams left the company this summer, however, and 3Com still is searching for a chief executive for the unit.
Industry analysts believe that 3Com also opted for the spinoff to sharpen its focus on its primary business, which is making computer networking products. That business has been under assault from Cisco and other competitors, causing 3Com's market share to slip.
"It was taking internal attention to cultivate the Palm business," said Martin Pyykkonen, an analyst with CIBC World Markets in San Francisco, who has a "hold" rating on 3Com's stock. "Now they spend their time on their core business."
Speaking at a news conference in New York, Benhamou stressed that "3Com will renew its commitment to the networking business."
Analysts speculated yesterday that the spinoff could make both the Palm unit and the rest of 3Com riper targets for an acquisition. Cellular-telephone makers, including Nokia Oy and Ericcson AB, could be interested in Palm, while telephone-equipment manufacturers such as Lucent Technologies Inc. could want to purchase segments of 3Com's networking-products business, analysts said.
Shares of 3Com, based in Santa Clara, Calif., rose $1.62 1/2 yesterday to close at $28.87 1/2.