eMachines prices at $9 a share

Analysts remain on the fence about eMachines IPO prospects
Written by Larry Dignan, Contributor

eMachines priced its 20 million share initial public offering (IPO) at $9 (£5.58) a share on Thursday for trading on Friday. The price range was $8 to $10 (£4.96 to £6.20) a share. Credit Suisse First Boston is the lead underwriter.

The company, which made a splash with cheap PCs, initially filed with regulators to go public in August. In January, eMachines acquired FreePC, a Bill Gross idealab! company that subsidises the price of a PC with Internet access and advertising. eMachines scrapped the FreePC business model, but will use the firm's expertise to gain advertising and direct marketing revenue.

eMachines reported pro forma 1999 sales (including FreePC) of $815.5m (£505.6m) and a loss of $84.5m (£52.3m). Sans FreePC, eMachines reported sales of $814.3m (£504.8m) and a loss of $5.7m (£3.5m). The company sees losses ahead, but did report a slight profit of $2.2m (£1.3m) in the fourth quarter.

Analysts were on the fence about eMachines' IPO prospects. If investors view eMachines as an information appliance company, the IPO may do well. However, if it's viewed as a PC maker in a tough market, the IPO could have a tough time.

"The deal may work in the short term, but there's competition everywhere," said David Menlow, chief of IPOfinancial.com. Menlow said eMachines' IPO could mirror that of Buy.com, a big business-to-consumer (B2C) company that did well on the first day, but lost momentum quickly.

The PC manufacturer, which offers desktop computers priced from $399 to $1,199 (£247 to £743), said it will leverage FreePC's model by dropping the free PC but continuing with the streaming ads on customers' screens. "This combination extends a Web-based portal business model to the hardware itself," the company said in filings.

In regulatory filings, eMachines said it will leverage its idealab! and America Online (AOL) partnerships to meet its goals.

eMachines will try to position itself as an Internet appliance company, but nearly all of the company's revenue comes from low-margin PC sales. Internet revenue, which primarily derives from sending customers to AOL, was only $3.2m (£1.9m) for 1999, including FreePC. And that statistic means eMachines faces a lot of competition in the PC space without much of a Web selling strategy.

The company relies on retailers such as Best Buy, Circuit City and distributor Ingram Micro to move its PCs. In addition, competition is fierce with the likes of Dell Computer, Gateway, Compaq Computer, Hewlett-Packard and Apple Computer all battling for customers.

eMachines also competes with Microsoft's WebTV and other Net appliance makers. The company plans to launch some Internet appliance products in upcoming quarters.

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