The first-day surge in shares of

Palm

(PALM)

attracted the attention of arbitrage-minded investors, as many sought to exploit the big difference in market capitalization between Palm and its parent company,

3Com

(COMS)

.

The stock market was valuing 3Com for far less than its stake in Palm alone was worth.

But some professional traders warned that this arbitrage opportunity, buying 3Com and short-selling Palm, is quite risky.

The apparent arbitrage opportunity came after Palm surged 150% after its initial public offering to close at 95 Thursday, while 3Com fell 21.4% to close at 81 13/16. As a result, the Palm subsidiary was valued at $53.3 billion, but its dominant shareholder was only valued at $28 billion.

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The difference between the two narrowed Friday after Lehman Brothers highlighted the pricing anomaly, saying 3Com should be valued at $170 a share, based on Palm's closing price Thursday. Palm's stock Friday closed down 14 13/16, or 15.5%, to 80 1/4, while 3Com gained 1 1/4, or 1.5%, to 83 1/16. But the disparity in market capitalization still exists. Palm's market capitalization at the close Friday was $45 billion while 3Com's was $28.4 billion.

If investors were to try their luck at the spread, they would have to sell shares of Palm short while buying 3Com shares. The bet is that Palm's stock falls while 3Com climbs to reflect the value of its Palm shares.

The first obstacle to putting on the spread is borrowing Palm stock, or getting a locate, in order to sell the shares short. "With an IPO, a regular settlement period takes three or four days before the banks see the shares and then another day or two before lenders and institutional banks have it to give out," said Michael Cardaci,

J.P. Morgan

vice president and a trader on the bank's equity finance desk.

Cardaci added that finding a lender with such a hot new issue is particularly difficult. So the Palm side of the transaction makes the spread virtually impossible until next week and still a gamble after that.

"Even if you find a lender, I have been telling my customers that the borrowing could cost you more than anticipated because of the level of sophistication on the lenders' side," Cardaci said. Essentially, short-sellers would have to pay higher margin rates to borrow and increase their risks.

Also, for a few days after an IPO, the underwriters are the most aggressive in the market for borrowed stock, which could further bump up the borrowing rate. Underwriters typically do this to cover any receipt of shares they have incurred in underwriting. And with such a large offering of 23 million shares, lead underwriter

Goldman Sachs

and others will doubtlessly be borrowing to clear their customers' trades.

The time of 3Com's planned spinoff of its Palm's shares also raises questions in the near term. 3Com's management has said it intends to spin off remaining Palm shares to 3Com shareholders within six months. That could be ready today, tomorrow, or six months from Thursday.

And the Palm division arguably has been supporting 3Com's languishing business over the past year. So once a date is set for shareholders of record to get the Palm spinoff, 3Com would most likely fall.