Editor's Note: Today's offering of Palm (PALM:Nasdaq) was the subject of several earlier columns by Adam Lashinsky, who spelled out in lavish detail the orchestration of this offering into one of the major IPOs of the new year. The column below first appeared on TSC on Feb. 2. The deal was priced last night at $38 per share.
FEB. 2, 2000 -- A recent cartoon in the
The New Yorker
featured a prostitute leaning into the passenger-side window of the car of a would-be customer, a dopey-looking guy driving a snazzy model. "For an extra 50 bucks," she says, "I'll let you show me your Palm Pilot."
Such is the allure of
, the handheld-computer maker soon to be spun out from
, that a toy based on a technology given up for dead four years ago (pen-based computing) has entered the popular lexicon. The familiarity among the broader public, the fact that Palm is an admirably profitable company going public in the profit-free Internet era, and the rosy outlook at the Santa Clara, Calif., company nearly guarantee that its IPO in coming weeks will be a barnburner.
But a handful of details disclosed in an amended Palm IPO filing late last week shed even more light on why this one will be hot, hot, hot.
item in this column in mid-December employed some exceedingly unsophisticated analysis to guess what Palm's valuation would be. Because the average price-to-sales multiple of
at the time was about 8.5 -- nearly 3 times the multiple to its revenue that 3Com enjoyed -- I speculated that Palm, too, would get a price-to-sales multiple in the 8.5 region.
Never mind that Palm is a handheld-computer company that is perhaps at best a mix between
. Palm is growing quickly, and its newest gizmo, the Palm VII, is very much a wireless device. The kind of people who delight in showing off their Palms -- the cartoon is funny for its verisimilitude -- will love to check stock quotes or airplane schedules from their VII's. Bottom line: Palm snags a wireless multiple.
Well, it turns out that the brainy investment bankers at lead underwriters
Morgan Stanley Dean Witter
used the same back-of-the-envelope analysis that I did. In its filing, Palm has initially pegged its price between 14 and 16. At a maximum postoffering share count of 573.5 million shares, that means Goldman and Morgan Stanley think Palm is worth between $8 billion and $9.2 billion. The multiple to sales, based on annualized revenue of about $1 billion: between 8 and 9 times. Hmmm.
Finally, after Goldman and Morgan confirmed the public's earlier notion that Palm is worth so much, 3Com's stock has begun to run again. At Tuesday's close of 51 3/8, 3Com's stock is near the 53 1/8 level it hit in the euphoric week following the initial Palm filing.
. 3Com said in mid-September that it would offer "less than 20%" of Palm to the public and then distribute the balance to 3Com shareholders within six months. The filing reveals that the public is going to get a much smaller initial bite than previously believed.
At most, the public will get its paws on 4.6% of Palm, with investors
, Nokia and
getting an additional 2.6%. 3Com will hold the balance for now. Including an underwriter's overallotment, Palm will offer 26.5 million shares, out of a maximum of 573.5 million outstanding. Presumably, Nokia, Motorola and AOL will hold onto their combined 15 million shares.
As tech-stock investors have learned over the past several years, when investment bankers constrain the supply of a heavily demanded issue, the price soars. Until and unless 3Com makes a secondary offering of Palm and distributes Palm stock to its shareholders, Palm will trade on a thin float. Even if Palm raises its offering range above 14 to 16 based on indicated demand from institutional investors, the ultimate trading level in this stock's first few days is anybody's guess.
. To someone who reads lots of IPO documents for Internet companies, perusing the Palm document is like watching a contemporary drama after seeing a bevy of sci-fi flicks. Palm's gross-profit margins are consistently about 43% or 44%. That's nothing special compared with a successful software company, but worlds better than an
or a more prosaic manufacturer. For comparison,
most recent quarterly gross margins were 64%. Dell's were 20%. As
might say, Get it?
Also expect a lot of excitement over Palm's relationship with Motorola, Nokia and AOL, each of which will flog either Palm's hardware or software -- or both. The same is true for Sony, which plans to license Palm's operating system, and
, which is expanding its relationship with Palm, according to the filing.
When this deal begins trading, assume many investors will want to take a look at it. Who knows, maybe they'll even pay 50 bucks.
Adam Lashinsky's column appears Tuesdays, 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