*Extra* With Wireless Packaging, Palm Could Pilot IPO to Bigger Payoff - TheStreet

*Extra* With Wireless Packaging, Palm Could Pilot IPO to Bigger Payoff

Convincing analysts that it is indeed a wireless company could help Palm once it goes public.
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The market's reaction to the impending initial public offering of

3Com

(COMS)

subsidiary

Palm

shows just how valuable Wall Street expects the handheld device maker to be. The long-ago-subsumed

U.S. Robotics

(swallowed, painfully, by 3Com in 1997) bought Palm Computing from its founders in 1995 for just $44 million. Palm likely will collect more than that from

Motorola

(MOT)

alone, which has agreed to buy shares worth up to $65 million in Palm's IPO next year.

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message boards.

So frothy is the market already for Palm that 3Com's value increased by $2 billion on Tuesday. The excitement over 3Com's plodding stock comes because 3Com shareholders will receive the balance of Palm shares not offered in the IPO.

But what's even more interesting is the question of which analysts Palm's investment bankers will assign to follow the company. The three lead bankers are

Goldman Sachs

,

Morgan Stanley Dean Witter

and

Merrill Lynch

. According to sources familiar with Palm's IPO plans, the Merrill analyst on the deal will be Steve Milunovich, who has carved out a niche for himself as an information-appliance analyst, in addition to his big hardware responsibilities. Morgan Stanley's Alkesh Shah, who follows wireless concerns, will follow Palm for his firm. (I couldn't learn who Goldman's analyst will be, and no firm involved would discuss their coverage lineup while Palm is in registration with the

Securities and Exchange Commission

.)

Shah's coverage is noteworthy because, at first blush, Palm isn't a wireless company. Its parent is a data communications company, and personal digital assistants, or PDAs, arguably are part of the personal-computer industry. But wireless companies have much bigger multiples (the valuation investors pay in the stock price for each dollar of sales, earnings or other measurement). Palm is sort of a wireless company: Its Palm VII toy has a wireless modem for checking stock quotes, emails and the like.

So if Palm can convince other analysts that it indeed is a wireless company, that move could pay off once the company is public. Consider the following: At its current price, 3Com's stock is valued at about 3 times its annual sales of $5.7 billion (or sales per share of $16), about in line with computer manufacturers

Dell

(DELL) - Get Report

,

Compaq

(CPQ)

and

Gateway

(GTW)

, which sell for an average multiple of 2.7 times sales.

But wireless companies

Qualcomm

(QCOM) - Get Report

,

Nokia

(NOK) - Get Report

,

Ericsson

(ERICY)

and Motorola sell for an average of 8.5 times their annual sales (a figure enhanced by Qualcomm's stratospheric valuation). If Palm goes public at 3 times its annualized sales of $704 million, it's worth a little more than $2 billion. And that annualized sales figure is based on its latest quarter, which is seasonally slow. But if the company can achieve a wireless multiple of 8.5 -- presto! -- it will create an IPO worth about $6 billion. That's some incentive.

Donna Dubinsky, CEO of Palm software licensee

Handspring

and a co-founder of Palm, guesses that the investment banks themselves are trying to figure out who should be covering Palm and, eventually, Handspring.

"What I have learned as I've met with all these guys myself is that there isn't really an analyst to cover" the PDA segment, she says. "This is such a converging of disciplines that I'm finding that with each individual banker it sort of depends case by case who is interested and who shows initiative for it." Handspring plans to go public next year.

Palm is profitable, growing and able to energize its moribund parent simply with the indication that it's going public. As a tech-industry success story and a high-growth start-up at once, Palm should define the tech IPO market in next year's first quarter. And pay attention to its brokers' intellectual gymnastics in trying to figure out how Palm should be categorized. That's when these behind-the-scenes flips and summersaults will matter.

Ryles Riles Up Wall Street

Scott Ryles caused a stir last month when he bolted Merrill Lynch, where he had been the top tech banker, to start up a new investment boutique funded by three venture-capital firms, along with discount brokerages

Charles Schwab

(SCH)

,

Ameritrade

(AMTD) - Get Report

and

TD Waterhouse

(TWE)

. Now Ryles is causing further commotion by plotting a raid on his competitors' banking and research departments in order to staff his new venture.

Rumors are swirling on Wall Street that Ryles also has a "nine-figure budget" (that's hundreds of millions of dollars -- I had to use my fingers) to shop for banking professionals and that his target is none other than Merrill Lynch.

Ryles acknowledges that one-third of the chitchat is true. The part that's right, he says, is that he's hunting for a team. And he acknowledges that it's awfully tough to hire right now because most Wall Street professionals are awaiting their year-end bonuses. He isn't talking about where he'll recruit or the size of his budget, though he does allow that he's forked over $50,000 to a naming firm for his as-yet-unnamed operation. He also says he's shopping for an

a la carte

team, not someone else's department. "We aren't going to do an entire group," he says. "We have no interest in that."

He does, however, have an interest in convincing people that the Schwab-Ameritrade-Waterhouse outfit will be more than "

Wit Capital

(WITC)

with more firepower." There will be juice, to be sure. Ryles figures the triumvirate has access to 54% of all online assets and 80% of all online buy-and-hold customers. The latter figure refers to online investors minus daytraders.

The new bank also is cooking up unique ways to offer research to clients, as well as to gauge retail interest in IPOs. The effect, says Ryles, will be to eliminate the conflicts of interest inherent in the current investment banker-masquerading-as-research-analyst routine. The bank also will attack today's mispricing of IPOs without using

W.R. Hambrecht's

Dutch auction process. He says that he's recruited a team of techies to work on the latter issue and that one key to the cost structure is the absence of brokers. But he's mum on exactly how it will all work.

Due to the time-consuming regulatory process, Ryles' shop won't be up and running until April at the earliest. He and his recruits had better hope the IPO market still is raging then. It'd be a shame if they showed up for the party just as it was ending.

Adam Lashinsky's column appears Mondays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at

alashinsky@thestreet.com.