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Middling Share Price for EMachines

Stocks: That sparks some debate as Irvine's hot bargain-computer outfit starts trading today.

March 24, 2000|ROBIN FIELDS | TIMES STAFF WRITER

Bargain computer maker EMachines Inc. raised $180 million Thursday in pricing its first public sale of stock, which starts trading today amid continued debate over whether the company can translate its eye-popping sales into profits.

The Irvine company's initial offering was priced Thursday at $9 a share, the midpoint of the expected range.

Some analysts said the price reflected a lack of demand and investors' concern about $84.5 million in losses EMachines recorded last year.

"The prospects for this are not going to be that strong," said David Menlow, president of IPOfinancial.com, which tracks initial public offerings.

But other market watchers predicted that EMachines' dizzying emergence as the industry's fourth-largest consumer personal-computer company in less than two years would erase doubts about its business strategy.

"I realize they're operating at a loss, but they've managed to come out of nowhere and build a pretty significant brand," said Ben Holmes, founder of ipoPros.com, another firm that monitors new issues. "The stock's not going to double or triple, but anyone who can generate that level of sales is showing there's room for them."

EMachines executives, in the so-called quiet period that precedes an IPO, did not comment on the pricing. The company sold 20 million shares.

Founded in late 1998, EMachines made a splash by introducing the first branded personal computers priced at less than $400.

Its approach generated instant volume and sent a ripple through the industry, forcing other computer makers' prices downward. The company has sold more than 2 million PCs, supplying many of the low-cost models packaged with Internet service offers by providers like America Online. Its sales topped $815 million last year.

But EMachines' profit margins are about 4%, far slimmer than that for competitors such as Compaq Computer Corp. and Dell Computer Corp.

The question is whether the company can expand beyond PC sales, leveraging its massive customer base to sell online advertising and become an Internet service provider itself.

"There's more pressure now on PC pricing. It's increasingly competitive," said Anne Bui, an analyst at International Data Corp. "They've got to invest beyond the box, but to be anything more than a box provider requires major investment, and they already have huge losses."

In November, EMachines bought Free-PC Inc. largely to acquire proprietary software, which funnels users to advertiser-sponsored Web sites with a single touch of special keys on EMachines keyboards.

Some analysts, however, have suggested that EMachines overpaid for the money-losing Pasadena company, which gave away free computers in exchange for bombarding customers with advertising. In regulatory filings, EMachines shows that it will pay $146 million in stock over two years for Free-PC's intangible assets, mostly goodwill. The full value of the deal remains unknown.

The EMachines stock that will trade on Nasdaq under the symbol EEEE represents 6.2% of the company. After the offering, Bill Gross, chief executive of the Los Angeles incubator that launched Free-PC, will have a 12.4% stake in EMachines. AOL will own 6.4% of the company and Stephen Dukker, EMachines' chief executive, will have 5.7%.

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