No, 3Com isn't cutting off its hand, but the networking company is splitting from its Palm.
And, in the face of expected competition from the PalmPilot's developers, it's none too soon, analysts say.
3Com confirmed Monday that it's spinning off its handheld computing unit and will take Palm public in a stock offering early next year.
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The announcement came in the midst of widespread rumors that Handspring, a handheld computer startup, is about to make its commercial launch.
3Com executives said splitting the company would make it easier to focus on two main tasks: expanding in the handheld computing arena and reviving 3Com's struggling networking business.
The temptation to raise a ton of money through a Palm IPO also seemed to be a factor.
"Palm has reached a critical mass," said 3Com CEO Eric Benhamou, adding that today the company is in the "best possible position to maximize earnings for shareholders."
In the last fiscal year, the Palm division had US$570 million in sales, accounting for about 10 percent of 3Com's total revenues. It owns about two-thirds of the world's personal handheld computer market, including about 5 million PalmPilots and other devices using software licensed from the company.
Palm's expansion, however, has come while 3Com's core networking business has been struggling.
3Com, a leading maker of routers, modems, and switches, has been losing market share to rivals, most notably Cisco Systems. The company's stock has also taken a hit: In the last few months, shares have been in the $20 to $30 range, down from a high this past year of more than $50.
Given the circumstances, analysts weren't surprised by the decision to spin off Palm.
"It's been a long time coming. Palm Computing and 3Com were really starting to diverge," said Cynthia Hswe, a consultant with Strategis Group.
3Com got Palm in 1997 as part of a larger acquisition of modem maker US Robotics. Even then, analysts questioned how well the consumer handheld manufacturer fit in to 3Com's core networking hardware business.
The timing of the announcement also made strategic sense, Hswe said, now that Handspring is preparing to enter the market.
Although Handspring -- run by Palm developers Donna Dubinsky and Jeff Hawkins -- has yet to confirm a launch date, the company may unveil its new product as early as Tuesday.
3Com had to look prepared, analysts said.
"Once Handspring comes out, 3Com's stock is probably going to go down," Hswe said. "They want to present a stance that the Palm Computing unit will not be bogged down by any of the problems that 3Com has been having."
3Com executives said the Palm spinoff will focus on selling Palm-branded devices, providing mobile computing systems geared for the workplace, selling wireline and wireless Internet services, building portal sites, and pursuing licensing deals.
The company is hoping to generate a lot of business through licensing its operating system to other manufacturers. Manufacturing partners such as IBM and Qualcomm have used Palm software to create handheld devices to do things like check stock quotes or track inventory.
Benhamou said the spinoff will create the industry's first independent, publicly traded handheld computing company. 3Com has yet to appoint a chief executive for Palm, though it has recruited some well-connected board members, including Netscape co-founder James Barksdale.
Banhamou said he also didn't perceive of Handspring as a threat. "We welcome them into the Palm community," he said.
After the initial offering in early 2000, 3Com will hold more than 80 percent of Palm, but has plans to spin off the balance of the unit to 3Com shareholders two quarters later.
As recent months have demonstrated, a flashy IPO is a wonderful way to generate a huge market capitalization. For a company like Palm, with an established brand, an intriguing business model, and actual profits, a lucrative initial offering is almost a sure bet.
The announcement of the Palm spinoff, however, was accompanied by few details about 3Com's plans to resuscitate its networking operation. Benhamou said the company is looking at additional restructuring moves, but did not elaborate.
In a statement announcing the Palm spinoff, the company said the restructuring "will allow 3Com to be focused exclusively on building on its networking connectivity and infrastructure strengths to deliver the next wave of connectivity."
Investors responded to the announcement by pushing up shares of 3Com slightly. Shares closed up 6 percent at $28.81 on Monday. (Reuters contributed to this report.)
