Doing Handsprings Over a Palm Competitor's IPO

Scarcely a month after Palm's (PALM) spectacular March 2 debut, its fledgling rival Handspring is making a beeline to the IPO well, promising investors another chance to get in on the growing hand-held digital organizer market.

Observers say the offering should be hot, riding on the hype surrounding Palm's IPO and the hand-held market. But Handspring, which filed for an offering March 31 after launching its Visor product late last year, faces its share of challenges, including a short operating history and little revenue. It also will have to deliver on the promise of the Visor's "Springboard" expansion slot and catch up to Palm, which has the early lead in the sector.

The deal, underwritten by Credit Suisse First Boston, Merrill Lynch, Donaldson Lufkin & Jenrette and U.S. Bancorp Piper Jaffray, will raise an estimated $300 million. The company incorporated in July 1998 and launched the Visor in November 1999. It reported a loss of $20.5 million on revenue of $15.8 million for the six months ended Jan. 1, 2000; before then, Handspring had no revenue.

Family Tree

Handspring's Visor

Despite a red-ink-strewn income statement resembling that of the classic dot-com, IPO watchers expect Handspring to succeed because of its bloodlines. President, CEO and co-founder Donna Dubinsky was president and CEO of Palm for six years. Co-founder and Chief Product Officer Jeff Hawkins was a founder of Palm.

L. John Doerr, a general partner with Silicon Valley venture capital giant Kleiner Perkins Caufield & Byers, is a director. He is also on the board of high-profile dot-coms, including Amazon.com (AMZN) and Healtheon/WebMD (HLTH). "John Doerr is the all-time legend of VCs," says Tom Taulli, IPO analyst with internet.com(INTM).

Brand-name backing aside, analysts say Handspring's model is promising. "Handspring will do well," says Jill House, senior analyst with International Data. "It has a strong product strategy and segmentation goal." The Visor licenses the Palm operating system, whereas some of Palm's competitors have used the competing Windows CE platform. Palm, however, is emerging as the standard. "What's killed some of these upstart companies is trying to go against the grain, but the standard really is Palm," says Taulli.

The Palm V

It helps that Palm veterans Dubinsky and Hawkins know the Palm software inside and out. But its Springboard expansion slot is where its biggest potential -- and challenges -- lie. Handspring promises the slot can be used to plug in MP3 players and digital cameras in the future, but right now it's slim pickings. Besides Tiger Woods golf and extra memory cards, the expansion slot is largely a leap of faith -- so far. "Their strategy relies on them having a high adoption rate as well as a broad array of partners providing solutions for their platform," says House. "As Palm looks into its expansion options, Handspring is going to have to look into widening its product breadth and depth."

Sweaty Palms?

So far, announcements have been made for some two dozen expansion products by third-party developers, including modems, games and even a bar-code scanner, but the companies have been slower to roll out the actual products. It may be some time before the expansion slot is ready for prime time. As far as Palm's plans for developing similar technology, "Palm hasn't made any announcements regarding an expansion slot," says a Palm spokeswoman.

Handspring also will have to accommodate mass distribution of the devices; when it first launched the Visor in November, the company experienced logistical problems in getting the products out. No numbers for sales are publicly available, and Handspring declined to comment for this story, per quiet period regulations. But, says IDC's House, "Strangely enough, there were very few customer complaints."

Casio's Cassiopeia

And with IDC projecting that 6.4 million personal companions will be shipped by 2003 (up from 2.3 million in 1999), it remains to be seen if Handspring will be able to sustain that customer interest if it continues to have distribution problems.

There's also the increasingly dicey tech market to consider: Even Handspring's much-awaited predecessor Palm has given up its early gains. The stock is down almost 60% from its first-day close, though its market cap is still a healthy $22.6 billion. "What's happening to Palm stock?" asks Daniel Niles, analyst with Robertson Stephens. "It was stupid to have things go up to 100 and hit 165 at one point. I can almost guarantee that was not institutional investors -- it was mostly retail."

Robertson Stephens has a buy rating on the stock and performed underwriting for the IPO. Niles also says that once 3Com (COMS) finishes spinning off the company later this year, Palm will "do well from that point." Palm was not available for comment.

And even though Handspring is following in Palm's footsteps, House says there's plenty of room. "The market [for smart handheld devices] is nascent," she says. "They're growing the pie, but they're not even eating at each other's market share."

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