March 15, 2000
Strange New Math of Palm Inc.
By FRANK PARTNOY
W hy is Palm Inc., which makes the wildly popular Palm organizers,
worth more than 3Com, which owns more than 95 percent of it? Even
in our current financial Twilight Zone, where losses are positive
and price-to-earnings ratios meaningless, this anomaly is bizarre.
Yet it persists. Since March 2, when 3Com raised $874 million by
offering the public just 4.1 percent of Palm, Palm has been worth
more than 3Com. A lot more. At yesterday's closing prices, Palm was
worth $32 billion and 3Com only $19 billion.
Of course, 3Com stock has been a dud for a long time. Trying to
keep prices up, the company's management even bought the naming
rights to what used to be Candlestick Park in San Francisco. But
nothing worked. During last year's holiday season, as consumers
flocked to buy its new Palm devices, 3Com stock was frozen below
$50 a share. Although hungry day traders and Internet investors
loved Palms, they hated the rest of 3Com: boring products like
modems, switches and other basics of computer networks.3Com had a
history of earnings, which was highly suspicious. The company's
chief executive, Eric Benhamou, was too old, at 44, and too French.
So 3Com finally decided to give the masses what they want: Palm à
la carte. The public gobbled up the 23 million shares it offered,
and nearly half have changed hands daily since then. Web chat pages
are packed with messages to buy, buy, buy Palm and calling 3Com
worthless.
Part of the explanation is that there are so few Palm shares to
trade that they are viewed as scarce. Another part is that day
traders, who are responsible for much of the current frenzy, do not
look past tomorrow. Eventually prices will adjust: 3Com will
probably issue more Palm shares in September; even if it doesn't,
3Com's share price eventually should reflect its 95 percent
ownership of Palm.
Some savvy traders have been trying to buy 3Com shares and sell
Palm shares short, a way of gambling that Palm will go down and
3Com will go up. But other traders, most notably technology day
traders, keep elevating Palm over its parent, stubbornly refusing
to believe that two is greater than one. Even yesterday, as Nasdaq
stocks tumbled, Palm's shares fell but 3Com's fell more.
The chat room buzz yesterday included plenty of advice to a
77-year-old investor who claimed to have taken a second mortgage to
buy Palm and wondered whether he should borrow even more to double
his holdings after prices briefly declined.
For anyone who thinks stock prices have reached irrational levels,
the Palm-3Com story is the strongest evidence yet that the stock
market's otherworldly show may be coming to a close.
Frank Partnoy teaches corporate law at the University of San Diego
School of Law and is author of "Fiasco: The Inside Story of a Wall
Street Trader."
Copyright 2000 The New York Times Company