Originally created 09/14/99

3Com to spin off Palm Pilots

NEW YORK -- Wall Street investors are among the most loyal users of 3Com's popular Palm electronic organizer. But now they get to vote about how the gadget really stacks up against the competition.

Four years after creating the handheld computer market, 3Com Corp. plans to spin off its Palm computing unit into a separate public company, hoping to unleash a flood of investment capital to fund the fight against a slew of newcomers.

3Com hopes separating the two companies will help it focus on its main business of selling computer modems and networking equipment, such as routers that help data move between computers. Despite its popularity as the No. 1 handheld computer, the Palm never really drew investors to 3Com in part because it didn't complement the company's other products.

3Com said Monday it wants to launch an initial public offering early next year, selling 20 percent of Palm to investors. The deal could value the new company anywhere from $5 billion to $10 billion, analysts estimated.

"Palm was creating a huge distraction for 3Com, which found itself caught between two mostly unrelated business models," said Rob Enderle, an industry analyst with the Giga Information consulting firm.

Investors welcomed the IPO announcement. 3Com's stock soared 6 percent, or $1.62 1/2 , to $28.87 1/2 on the Nasdaq Stock Market.

About 4 million Palms have been sold since their introduction in 1995, becoming a sort of mobile badge for on-the-go professionals seeking a convenient way to store contacts, appointments and notes. The product accounted for $570 million in fiscal 1999 sales at the Santa Clara, Calif.-based 3Com, or 10 percent of the company's total revenue.

But while the Palm comprised 40.1 percent of worldwide sales of handheld computers last year, that was down from 41.2 percent in 1997, according to the Dataquest research company.

Behind the figures, a crop of rival machines that look just like the Palm -- many of which run on Microsoft's Windows CE software -- are vying to usurp the 3Com's crown.

The Windows rivals tout the advantage of Microsoft's ubiquitous operating software over 3Com's proprietary system. With the Windows system running the basic functions of the new gadgets, the idea is to prod many of the myriad developers who write programs for Windows-based desktop computers to also write for the pocket-sized ones.

In addition to Windows-based machines, Palm faces competition from a new low-priced personal digital assistant created by the Palm's creators, who struck out on their own last year. Handspring Inc., based in Mountain View, Calif., is expected to announce on Tuesday its new Visor is targeted to everyday consumers, instead of the mobile professionals loyal to the Palm computer.

3Com's stock price has lagged that of its largest rival, Cisco Systems Inc., and is trading at little more than half where it was at the beginning of the year.

Indeed, owning Palm may have hindered 3Com's ability to work together with Microsoft Corp., a Palm rival, to enable 3Com's networking products to work well with Windows-based desktop computers.

Palm is striving to expand a new strategy of licensing out its operating system to other gadget makers, including Handspring. Within two years, the company's revenue from hardware, or selling the Palm gadgets, is expected to be surpassed by revenue from licensing fees.

"Platform OS licensing is the essential ingredient to the 'Palm economy' " 3Com chief executive Eric Benhamou said in an interview.

3Com is still searching for a chief executive to lead the new Palm company. James L. Barksdale, the former Netscape Communications Corp. chief executive and a 3Com director, along with Gordon A. Campbell, president and chairman of Techfarm Inc. and a 3Com director, will join Palm's board.


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