Transatlantic Cable: Greasy Palm

Scarcely a day goes by in Silicon Valley without a company going public. Initial Public Offerings (IPOs) are happening all the time, with all sorts of IT companies selling shares to investors to try and capitalise on the Net boom.

Most of these are relatively new, small companies that want to expand using the money they raise by selling shares. This often makes them a risky investment. Sometimes you get a big company that decides to go public, a well established brand with long term profits and plans that would seem to be relatively risk free. But in the wild and whacky Internet economy, you can't take anything for granted...

Palm is the company behind the highly successful Palm PDA. Originally founded in 1992 by Donna Dubinsky and Jeff Hawkins (who now head up the rival PDA company Handspring), it was bought out by modem company US Robotics, who were in turn bought out by 3Com. They then decided to spin it off as a separate company and reap the rewards. The company has an excellent product range, good market penetration and is generally well regarded. The sort of company, you might think, whose shares would attract investors and maintain their value over time. So why did its shares shoot up on their first day and then drop like a stone on the second?

The shares started trading on 2 March and were initially priced at $38. They quickly shot up to a first day high of $165. Everything seemed hunky dory, and the investor bulletin boards were overflowing with people who were buying the shares as they rose, confident that it was on the way up.

Unfortunately, they were wrong. After the usual first day rise, the shares fell rapidly to a low of $70 - still a respectable gain on their initial price, but hardly what the IPO-crazed Net investors would expect, and bad news for those who had bought at a higher price. Plenty of people lost their shirts when the shares dropped, with over 35 million Palm shares changing hands on the first day before the price started to slide.

Of course, as any broker will tell you, the value of shares can go up as well as down, but you can't help but feel a bit sorry for the people who bought the shares at their peak only to watch their value slide. One small investor who bought the stock at $130 (who wished to remain anonymous) told me: "It seemed like a good buy at the time, a share that would keep climbing. But then it dropped like a stone the next day, and now I'm about $5,000 down."

The reasons for the fall are numerous, but one major factor is what investors call momentum. People get the idea that the share is worth more than its current price, so they buy it. Other see this and follow suit, driving the price up further. But this isn't because of any major announcements or broker tips - it's purely based on the hype around the share and the fact that it's a high-tech IPO. Eventually, someone gets nervous and sells, and everybody else gets panicky and sells, driving the price down quickly. It used to take weeks for this to happen, but in a world of daytrading, this can now happen in a just a few hours...

As one witty soul put it on the Motley Fool message board: "This is to all of you pathetic whiners out there that have come to sob on this board. From now on whenever you get the urge to chase a momentum stock, I want you to repeat this out loud ten times: 'I promise not to be a greedy moron'".

Mind you, the share now shows some signs of recovering, and is currently around the $70 mark. But it seems unlikely that it will reach its previous price for some time, leaving a lot of people unable to afford a new Palm Vx.