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Eric Benhamou & the Turnaround of 3Com (Part 15)

Posted on Monday, Sep 3rd 2007

Finally, poised for success, 3Com did spin off Palm as a separate company.

SM: I think you find that a lot with folks who are entrepreneurial by nature – they like to be in charge of their creations. I know you ultimately did spin off Palm as a separate company, when did that happen? EB: By 1999, things had changed. Enough time had gone by that technically I had the option to spin off a piece of the business without incurring a tax penalty.

Second, Palm was no longer a fledgling company, and thirdly, I had been able to inject management talent in the business so it could stand on its own. Because we had done some integration with a few pieces of 3Com, we had been able to get economies of scale and improved the profitability of the business.

Finally, the market as a whole recognized this was an emerging category and it was no longer a toy. There were analysts covering it and it could gain valuation. I was then convinced the best way to leverage value was outside 3Com because we were putting a lot into Palm but not getting much in return.

SM: And you were not getting much valuation out of it either, were you? EB: No, we were getting some conglomeration discounts, but that is all. The only way to monetize the value was to spin it out. Particularly at a time when there was inflation in valuations and investors were drawn to pure plays with high growth.

We felt we could get a premium if investors could look at this business as a separate business. Fortunately we kept the brand and structure separate, with its own sales force, so we had the option to do that.

In the summer of 1999 I started to think about this very seriously, and I asked Goldman Sachs to do a study for me and they convinced me we could do it. In September 1999, after the Labor Day weekend, I called a board meeting and asked my board to support the spin off of Palm. Everyone felt comfortable that it was the right time and the right thing to do. We started to set things in motion.

SM: Was there any competition in this area – you mentioned Donna and Jeff had left to form another company. EB: As it turns out Donna and Jeff, who had formed Handspring the year before, had asked me for a license of the operating system to build their own handspring product. They came to brief me around the same time and told me “Eric, we have finished our first product and we are going to launch it next week. We want to show it to you so you can see what it can do”.

Their products were basically a clone of Palm, using our operating system. They were going to launch it on Sept 10th, the same date that independently we had chosen to announce our intention to spin off Palm. We had reached this decision independently, it happened to be a national conference, so the timing was right, but I could not tell Donna and Jeff about it – they could not be insiders because they were not employees of the company.

When the day arrived, they had their own press conference at their own event, and we had our own to announce the spin off of Palm, which completely dwarfed the Handspring launch. I felt bad for Donna because we took the limelight away, but that is how it happens.

We ended up taking Palm public on March 1st of 2000. At the time, NASDAQ had already passed 5,000, and it peaked at 5,048 three days later. Had I wanted to optimize the IPO of Palm, I could not have timed it better – maybe by a few nano seconds.

[to be continued]

[Part 14]
[Part 13]
[Part 12]
[Part 11]
[Part 10]
[Part 9]
[Part 8]
[Part 7]
[Part 6]
[Part 5]
[Part 4]
[Part 3]
[Part 2]
[Part 1]