Palm IPO, Set for Thursday, Promises Big Splash

But not everyone's sold on the handheld-device maker's prospects.
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Mark your calendar: The highly anticipated Palm IPO should get out of the gate this week.

The IPO is one of the season's most eagerly anticipated deals, as illustrated by the jump in shares of parent

3Com

(COMS)

that followed the modem firm's announcement it would spin off the unit. Because of Palm's household-name status among techies and the stock's appeal as a wireless play, investors expect a huge first-day bounce, along the lines of the one seen by

Aether Systems

(AETH)

, a wireless company that's up some 1,000% since its October IPO.

But Palm still has its skeptics, who see increasing competition in the handheld-device field and debate how widely consumers will embrace the devices. With the

Dow's

recent retreat spurring questions about the health of the bull market, any less-than-spectacular gain in Palm shares is likely to fuel further talk of a bear market.

Big Deal

The 3Com subsidiary will sell 23 million shares March 2 in a deal backed by powerhouses

Goldman Sachs

,

Morgan Stanley Dean Witter

,

Merrill Lynch

and

Robertson Stephens

. The shares are expected to fetch between $14 and $16 apiece, valuing the offering in the neighborhood of $350 million.

Palm, the leading producer of personal digital assistants, also owns the leading handheld-organizer operating system and has been branching out into the wireless world with the Palm VII, which enables Internet access. "It's sort of a play on the boom in the wireless area," says Peony Kao, an analyst with

Renaissance Capital's

(IPOSX)

IPO Plus Aftermarket fund. "Palm is looking to be another wireless platform." Renaissance doesn't have holdings in 3Com.

And unlike so many tech companies seeking new listings on the

Nasdaq

, Palm is actually making money. It reported $22.5 million in net income on $435 million in revenue for the six months ended Nov. 26, 1999.

International Data Corp.

says Palm controlled 68% of the worldwide handheld-device market in 1998.

Strong Numbers

The market has already gotten hints that the IPO will be big. 3Com, which was trading in the 20 to 30 range for most of last year, has skyrocketed since Palm filed to go public. It's now trading around 77, up 73% since the Palm filing on Dec. 13. "I'm thinking that based on that alone, Palm is going to be one of the biggest first-day gainers this year, if not in the history of IPOs," says Tom Taulli, an IPO analyst with

internet.com

. It'll take a more than 698% gain to beat out

VA Linux Systems

(LNUX)

, the biggest-ever first-day gainer when it went public on Dec. 9.

"I wouldn't be surprised if it does something like

Red Hat

(RHAT)

, where the second day, it goes up again," says Taulli. Red Hat gained 271% on its offer price the day it went public, Aug. 11, and jumped subsequent days as well, putting it 500% above its offer price by the third day. With so many offerings seeing a significant first-day jump followed by a decline in the days following, a strong second day is a litmus test for an IPO's staying power. Red Hat is currently trading around 70, 900% above its split-adjusted IPO offer price.

Handspring Is Here

Still, not everyone is giving Palm a thumbs-up. "Let's see where Palm is a year or two from now," says Vincent Slavin, a sales trader who tracks IPOs for

Cantor Fitzgerald

and wonders if the digital handheld organizer appeals to a broad enough market. Cantor Fitzgerald doesn't have a position in 3Com.

For one thing, Palm does have its competitors. Former Palm execs Donna Dubinsky and Jeff Hawkins now head up

Handspring

, which markets the Visor, a direct Palm competitor. Handspring is also expected to go public sometime this year, and industry watchers say it may speed up its filing so it won't fall too far behind Palm. (A Handspring spokesman says the company hasn't made "specific plans" to do an IPO.)

Renaissance Capital's Kao also notes that Palm's CEO, Carl Yankowski, who started last December, lacks significant technology experience. "Before that he was at

Reebok

(RBK)

and

Sony

(SNE) - Get Report

-- consumer-related products companies -- but he wasn't directly tied to any sort of company in this area," Kao says. Palm didn't immediately return calls seeking comment.

"I don't see the whole world running around with a Palm unless you're an executive geek," Slavin says. "But it's not going to core an apple."

Even so, the Palm offering is a daunting one, and will likely continue the trend of a strong IPO market amid shaky action.