3Com To Spin Off PalmPilot Unit

3Com Corp., the second largest maker of computer networking products, has announced that it will spin off its PalmPilot unit.

Investors in the Santa Clara, California-based company are delighted. They have watched their shares plummet more than 40 percent since December, largely because of a flat market and the falling prices of modems and network connection cards. The popularity of Palm devices should help the company rebound, as well as give it a leg up on competitor Cisco Systems, Inc..

3Com will launch Palm’s initial public offering early next year by selling 20 percent of the spin-off to investors. According to industry observers, the deal could pump up the value of the new company from $5 billion (US$) to $10 billion.

“Creating the industry’s first independent, publicly traded hand-held computer company is a significant milestone, reflecting both current success and the future potential of our Palm business,” said Eric Benhamou, 3Com’s chief executive officer.

Skyrocketing Sales

3Com has sold about 4 million Palms since introducing the hand-held device in 1996. Palms range in price from $229 to $600. Part electronic planner, part communication device, the Palm accounted for $570 million in 3Com’s fiscal 1999 sales or 10 percent of the company’s total revenue.

Nonetheless, while the Palm garnered about 40 percent of worldwide sales of hand-held units last year, its market penetration was down from 41.2 percent in 1997.

Competition Heating Up

Analysts feel that there will continue to be a heightened interest in hand-held devices — especially because of their e-commerce potential. In the near future, users will be able to order anything from a book to 1000 shares of stocks via the Internet with their Palms. In addition, the Palm is already becoming a wireless communication device for e-mail.

Not to be outdone, Microsoft Corp. is touting its Windows CE operating system to software developers and the makers of competing units. Recently, Microsoft also invested heavily into Nextel Communications, Inc., which also sells a competing hand-held communication unit.

Meanwhile, the founders of Palm computing, Donna Dubinsky and Jeff Hawkins, will unveil yet another hand-held device called the Visor. The unit runs on Palm software licensed to the company. They hope to take their startup company, Handspring, Inc., public sometime next year.

Dubinsky and Hawkins left 3Com last year.

Licensing its programs to Handspring underscores 3Com’s strategy to make sure its software remains the standard operating system for all new hand-held units. Company officials estimate that there are already about 20,000 developers creating software and hardware products based on the Palm operating systems. They include such heavyweights as IBM, AOL, Sun and Oracle. In fact, within two years, 3Com’s revenue from licensing fees is expected to eclipse the revenue it generates from selling Palms.

About 3Com

3Com (Nasdaq: COMS) went public in 1984. It originally sold network adapter cards to large computer makers and resellers. In 1987, 3Com inherited a sales force when it bought router supplier Bridge Communications. In an effort to build name recognition, the company paid $3.9 million in 1995 to have San Francisco’s Candlestick Park renamed as 3Com Park through 2000.

In its fiscal year 1999 ending in May, 3Com earned $409 million on revenue of $5.7 billion. It also employs about 13,000 workers and serves more than 300 million customers worldwide.

Investors seemed to welcome yesterday’s spin-off announcement. The value of 3Com’s stock soared 6 percent to close at $28.88 per share.

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