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Palm spinoff leaves many unsure how to play hands
Parent company's stock dives after division is severed

NEW YORK -- For companies eager to spin off a hot technology business, the high-flying Palm Inc. stock sale by parent 3Com Corp. offers a juicy financial incentive -- but also a cautionary lesson for investors.

In the eagerly awaited stock debut, 3Com severed its Palm unit from the rest of the company and sold 23 million shares last Thursday. By week's end, investors had bestowed a stunning market value of $45 billion on the new offspring -- nearly double the value of Palm's far-larger and more established parent, whose stock plunged.Never mind that 3Com still owns 94 percent of the new company, the No. 1 seller of hand-held electronic organizers. Or that Palm's sales last year were about one-sixth of 3Com's revenues, which were derived mostly from networking equipment.

The yawning difference in market capitalizations points out uncertainty over 3Com's future, especially since the company plans to spin off the remainder of Palm to shareholders in a few months and operate independently.

And Palm, although it remains at sky-high levels, fell significantly from its peak Thursday, adding questions about what its true valuation should be.

To be sure, a small group of privileged investors profited from buying Palm stock in the IPO and then quickly selling it, as it soared from an offering price of $38 to a peak of $165 early on its first day of trading Thursday.

But many who bought the stock on the open market fared poorly as it fell steadily later Thursday and Friday, ending the week at $80.25.

"I'd say the majority of people were hurt . . . in that," said Art Bonnel, manager of the $360 million U.S. Global Investors Bonnel Growth Fund, which focuses on mid-sized companies. "When there is a little bit of confusion out there, stocks tend to sell off."

Palm, despite fast-growing sales, is making a risky change in its business model. Its IPO is intended to help fund a new strategy of licensing out its operating system software and letting other manufacturers build hand-held organizers using that system. Within two years, analysts project the company's revenue from selling the Palm gadgets to be surpassed by revenue from licensing fees from the operating system.

The ride in 3Com's stock was as rocky as Palm's. These shares stagnated for months, then rose sharply in the weeks ahead of the Palm offering as investors saw an alternative way of getting Palm shares when they are spun off from 3Com later this year.

However, when Palm went public Thursday, 3Com's stock sunk 21 percent, falling $23.311/4 to $81.811/4. It recovered a bit on Friday to $83.061/4.

Palm opened at 76 Monday; 3Com opened at 841/8.

Analysts said the seesaw debut in part reflected a harsh glare by investors on 3Com's remaining business. While sales of Palm organizers are soaring more than 50 percent a year, 3Com's overall sales -- including Palm -- dropped 4 percent in the latest quarter amid fierce competition from rival makers of networking equipment.

Investors, moreover, are uncertain whether 3Com will complete the distribution of Palm stock to 3Com shareholders, which depends on a ruling from the Internal Revenue Service that the shares will be tax-free. For its part, 3Com says it expects to distribute the Palm stake in six to nine months.

"I think people are just thinking that the spinoff is not a done deal," said Andrew Whittaker, an analyst at Lehman Brothers Inc.

A similar scenario, but with a lot more shareholders at stake, could play out next month when AT&T Corp. spins off its wireless telecommunications division, funding an initiative to bring telephone and Internet service into homes without wires.

The IPO could raise up to $10 billion. The wireless business is one of AT&T's fastest growing, and perhaps its most promising.

Like 3Com, AT&T's remaining business -- particularly its dominant long-distance telephone service -- are slower growing.

In a pattern similar to 3Com, AT&T shares started rising late last month as investors saw a way to eventually snag shares of the wireless stock.

Yet for all the similarities with 3Com's deal, chances appear far slimmer that an AT&T spinoff will exceed the parent's market value, now at a staggering $173 billion.

"Investors are going to be as fickle as they've ever been. But with AT&T you just have a lot more market cap to push around," said Steve Frenkel, a market strategist with the Ladenburg Thalmann & Co. investment firm.

Still, being free of AT&T's management is sure to help the wireless offspring, Frenkel said.

"Getting out from AT&T's imperious management is worth a premium to any small company," he said.