With an unstable market, Eric knew the price of Palm was not going to sustain at those highs. But what exactly happened when the market crashed?
SM: It is hard to sustain that kind of price range … EB: We knew the price had to come down, but we did not exactly know how it would come down. We also saw how history unfolded in terms of the crash. It turns out that we started trading on March 1st of 2000, and I think NASDAQ had already passed 5,000 and was within 48 hours of its all time record. Had I wanted to time it better for our shareholders, I don’t think I could have come closer.
Clearly shareholders enjoyed a tremendous return. It turns out we did not float as much of the company as we could have. In a two step spin you have to retain at least 80% of the shares you own, and distribute them as a dividend. If you don’t then you don’t benefit from the tax free treatment.
SM: Did 3Com retain 80%? EB: It turns out we retained more than 90%. It was not like Palm needed cash; it was already profitable and cash flow positive. It received a big injection of cash even with the small amount of shares we floated.
SM: Very similar to what is happening with VMWare and EMC. EB: The valuation is probably a little more warranted with VMWare. It is close to $20B, but it is a real business which has aged and withstood the test of time, and I don’t think it is the same quality of business as most. It has a deeper, better quality of revenue.
At the time we felt we had done the best we could do for shareholders, and it remains the most shareholder value creation I have ever achieved in my career. At the time I knew there were some unintended consequences. When you bring a public company to market that has not aged sufficiently, and which has a management team lacking maturity and being paid with options priced at a very high strike price, you don’t get a very good mix.
In fact you are in a very difficult situation because when the downturn comes, and it inevitably comes, you don’t have a management team which has the seasoning to withstand it. Suddenly their options are under water, so you don’t have the incentive power to retain them. It was a bad situation. Most people only realized this a few months later.
SM: When did you feel the pain of the crash? EB: It was almost a year later.