6.2 Example: 3COM and Palm
Palm,
Inc. was spun off from 3Com on March 2, 2000 and began trading
on NASDAQ with the ticker symbol PALM.
Five percent of the shares were issued on this date plus
it was well known that the remaining 95% would be split off on
July 27, 2000. That is,
3Com pre-announced that it would complete the distribution of
its 532 million shares on July 27, 2000.
All 3Com shareholders who owned 3Com, ticker symbol COMS,
at the close of market on July 27 would receive 1.483 shares of
Palm for each share of 3Com.
This
means that the price of 3Com should be at least 1.483 time the
price of Palm; in fact, you can calculate an implied value for
3Com from the price of Palm.
If, as happened on one day, Palm was trading at 95, then
3Com should be trading for at least 145.
But 3Com actually traded for 82 that day, which means
that investors thought that the rest of 3Com (its implied value)
was worth -$63. The
following chart shows how the stock prices and the implied value
of the rest of 3Com changed over the period March 2, 2000 to
July 27, 2000:
You
can see that the implied value of 3Com was negative (a
contradiction of limited liability) for over 1-month!