3Com acquired US Robotics, and then USR started shrinking in the modem market, one of its primary franchises. In a royal nightmare that ensued, Eric lost the advantage that 3Com had built as part of its first turnaround.
SM: Were there any positives which came out of this mess? EB: The only thing that came out different was Palm. Palm had been set aside because I felt it was a very interesting business, potentially a category maker. It didn’t fit our business except for some channel synergy. I let them run as an autonomous subsidiary, and I did not ask them to contribute to the bottom line of the company.
It was a big investment because other divisions were struggling. I let them invest in their business, but I did not ask them to participate in the same processes as the rest of the divisions – I did not want to integrate them tightly. It was a loosely coupled subsidiary.
Fortunately that bet worked because we were able to really substantially grow the business and create a category called handheld computers, which partially made up for some of the shortfalls we had in the US Robotics businesses.
SM: Large acquisitions are often very challenging to deal with, even if they make complete sense on paper. EB: That period, 1998 / 1999, was a very difficult period. Cisco had not made such big bets. They made smaller acquisitions and were able to pull ahead. We had almost closed the gap in 1997; they were at $5.6B and we were at $5.4B. Two years later they substantially pulled ahead.
This brings us to 1999. Palm had become a substantial business, approaching $500M in size; when we bought them they were at $20M. Right after we bought USR, the ink was not even dry on the agreement, the two founders of Palm, Jeff Hawkins and Donna Dubinski, were in my office explaining to me why I really should not buy Palm and that I should just spin it out. They preferred to be autonomous. They did not feel good about being part of USR, they were going to feel terrible being part of 3Com.
I listened, and told them that I bought USR in part because of the Palm business, and that we were not going to use a coercive management style, and that they would have lot of autonomy to build a new category of product, however we paid a lot of money for the business so I was not going to just let it go and that I wanted them to help build shareholder value.
This was the start of the conversation in 1997. In 1998 I was up to my eyeballs in problems with the rest of the USR business, so I had no patience to envision a separation of Palm. I could not even seriously consider it because in those days when companies combined and pooled assets, if you wanted to preserve the tax free nature of the transaction, you were supposed to keep the pieces together for a couple of years. If you bought a company though pooling, and you sold a piece of it you had tax liability.
We could not afford to have the entrepreneurial aspirations of a few people expose us to a multi-billion dollar tax bill. I worked for two years to make them understand that it was off the table. They left and formed handspring in 1998 because they were convinced I was serious about not spinning off Palm. I told them there was nothing I could do for at least two years, and then maybe I would consider it if the situation were right.
They decided to part ways; it was an abrupt separation. At the time I felt good about it because I did not think that they were going to be serious players inside the company, they would only help themselves but not me. Usually when you go through a fickle situation, you have to find out who is on the boat with you rowing, and they were not rowing on my account.