More Palmistry at 3Com

Plus, another look at Commerce One and the Webvan-HomeGrocer race.
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The end of the year is a time for tying up loose ends. Three pieces of unfinished business are updates on recent items published here. With these out of the way, it'll be time to focus on 2000.

Palmistry at 3Com

Shares of communications-equipment maker



have fallen so far that their so-called


premium seems to have evaporated. The stock, at 44 13/16 the day 3Com subsidiary Palm filed documents detailing its impending IPO, shot up as high as 53 1/8 the week of Dec. 20. After 3Com released details of its disappointing November-quarter performance and the outlook for next year, however, the parent's shares plunged, finishing Thursday at 46 3/4.

But that's not the end of the story. Judging from reader responses to an item here guessing at

how Palm will be valued, there's genuine confusion among investors as to what the IPO of the handheld-computer unit means to them. How does this distribution of shares -- a.k.a. the Palm "dividend" -- work? What's the exchange ratio? When does it happen? What will happen to 3Com's stock?

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The answers to some of these questions are imponderables for which investors will simply have to wait patiently. Other questions, notably the mechanics of how the deal works, are answered at a handy-dandy "frequently asked questions"

site established by 3Com.

For instance, 3Com explains that existing 3Com shareholders will receive shares of Palm about six months after the Palm IPO -- expected in February -- but that the "timing, structure and other terms regarding the subsequent distribution of the shares" are to be determined. This means that Palm hasn't yet disclosed the exchange ratio. The company also notes that the offering will be for "less than 20%" of Palm.

So that leaves 3Com investors guessing as to what the Palm IPO could do for them. That's not clear, but we can hypothesize on at least some of the relevant answers.

Assume, for example, that hot wireless companies are worth as much as 8.5 times their sales, as noted earlier. That would value Palm, with updated annualized sales of $1 billion, at $8.5 billion. Assume, again, that 3Com offers the public 15% of Palm, leaving a $7.2 billion stake to distribute to shareholders in the August time frame. And that's assuming no appreciation of Palm shares over the subsequent six months.

Now, with 345 million 3Com shares outstanding, the remaining piece of Palm could be worth as much as $20.87 per share to 3Com shareholders. Of course, part of the value of 3Com today is tied up in Palm, so investors will need to figure out how much their 3Com shares might


when Palm goes away.

Kinda like reading, er, Palms, no?

Delivering Just a Little More Webvan Information


compare-and-contrast exercise here about giant online grocery projects




could have been a little more accurate and a little more generous to the latter company. Because Webvan is public, it can talk about itself, which it did in reaction to a column that pointed out that HomeGrocer has done more business, done it more efficiently and is able to expand more quickly than Webvan. HomeGrocer recently filed to go public and is therefore in a pre-IPO quiet period.

The comparisons are valid. But it depends on how you slice and dice the data. First, to say simply that HomeGrocer has bested Webvan in nine months of revenue by $11 million to $4 million lacks some context. Webvan only got going in one location (San Francisco) in June, while HomeGrocer operated in Seattle for the entire nine-month period, before adding Orange County, Calif., and Portland, Ore., toward the end.

A Webvan spokesman also explained why the Foster City, Calif., company's gross margins were so much lower over the nine months -- 8% vs. 18% -- than HomeGrocer's. Webvan says it experimented with a lot of its precooked meals, which ended up as spoilage; this affected "costs of goods sold," the line item that is subtracted from sales to get gross profit. Going recently from five days of operations a week to six has also helped Webvan cut down on spoilage, the company says.

Finally, as corrected in a subsequent posting, Webvan aims to open for business in seven new cities in 2001, not 2002. It intends to fire up three additional distribution centers in 2000.

Only when both companies are operating on a bigger scale and over a measurable period of time will the competition truly become a spectator sport.

Commerce One Thousand

David Garrity's price target of 1,000 on

Commerce One


isn't looking so silly after all. The New York-based auto analyst with

Dresdner Kleinwort Benson

pegged Commerce One's share price at the millennium mark within 12 months a week ago, when the shares were worth 405 1/4. After four days of almost no news about Commerce One, the stock closed out the Christmas-shortened week at 598. That's a change in market value of a mere $4.6 billion. The company went public on July 1 at 21.

But the big number Garrity put out there will be remembered only as a snapshot in time. That's because Commerce One's previously announced 3-for-1 stock split took effect Thursday, thereby tripling the company's share count, slicing in third its share price and, as all good students of

Herb Greenberg

know, doing absolutely nothing to its value. Garrity's once lofty target is now a measly 333 1/3.

All this begs the question of why there's so much fuss over Commerce One. In an interview at the company's bursting-at-the-seams headquarters in Walnut Creek, Calif., Commerce One CEO Mark Hoffman did his best to explain.

The company basically makes money two ways. The first is by selling old-fashioned enterprise software to big businesses so that they can hook into Commerce One's Web sites to transact all kinds of commerce. That business is currently bringing in an average price of $700,000 per sale. But the revenue stream that excites Hoffman is counted in one-dollar bills. That's the average of what Commerce One charges suppliers who sell to those big companies -- an auto component manufacturer to Commerce One partner and investor

General Motors

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, for example -- over the young company's system.

"I don't care if it's a 747 or a pencil, it's a buck," says Hoffman.

Commerce One has plans to beef up its offerings to include invoices, payments and advertising services, all of which bring in these small but consistent revenue streams. In fact, Hoffman reports that nine lawyers at

Wilson Sonsini Goodrich & Rosati

are working full time to close partnerships for Commerce One before the end of the year.

Hoffman says the deals won't bring in a cent of 1999 revenue, but that it's imperative to get them done because that's what his partners want.

"We have a very short amount of time to really go after the market," he says.

At $14.3 billion in market value with $18 million of recorded revenue over the past year, Commerce One also has a very short amount of time to justify the enormous confidence its investors have placed in it.

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 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