3Com: IPO Hand-Off
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3Com's purchase of U.S. Robotics looked like an unmitigated disaster several years ago. It was the classic situation of buying at the top. Of course, in hindsight, the purchase looks like a stroke of brilliance. In the deal, 3Com (COMS) got Palm.
The stock of 3Com has been lackluster, that is, until the company decided to spin-off the Palm division. Since then, 3Com has been surging to incredible heights. Yesterday, the stock was up 18-15/16 to 98. The company is now selling at a lofty 58 times earnings and a $33 billion market capitalization.
However, investors should be wary of 3Com. First of all, while Palm is a pure-play on wireless, 3Com is an amalgam of a variety of businesses. The company sells network cards, modems, hubs, switches and routers. In fact, Palm accounts for only 15 percent of total sales. What's more, much of the business lines of 3Com have been flat, as they have become increasingly commoditized.
Next, there is lack of a coherent strategy from the company. 3Com will often make an announcement and then back-peddle. One example is the storage area network industry. 3Com said it would enter the business and then, in quick order, said it was not interested. Actually, the chief executive officer of 3Com said last May that Palm was a core business asset. Now, of course, it is going to be spun-off.
True, 3Com plans to distribute its remaining shares of Palm to existing 3Com shareholders (after the IPO, 3Com will own about 94 percent of Palm). According to Palm's prospectus: "3Com will, in its sole discretion, determine the timing, structure and all terms of its distribution of our common stock that it owns." In other words, there really is no concrete way to value the distribution. It is at the discretion of 3Com.
Finally, it is typical in spin-offs for the parent company to surge before the IPO and then, afterwards, to fall back to earth. Investors will want to instead purchase the spin-off, which is a pure-play and offers much more growth potential. This is a very likely scenario with 3Com.