EMachines Might Be Looking for a Buyer
Money-losing EMachines Inc., the company that spurred consumer sales of low-priced personal computers, might soon try to sell itself to the highest bidder.
The troubled Irvine firm, once the fastest-growing seller of PCs to retailers, said Tuesday that it has hired investment bank Credit Suisse First Boston Corp. to evaluate business options--including the sale of the company.
The company, which completed a restructuring with Monday’s announced hiring of five senior executives, has reached “an appropriate time . . . to explore opportunities to maximize shareholder value,” said Wayne R. Inouye, EMachines’ president.
Analysts have predicted for months that the 3-year-old company is nearing the end of its ride. Should it be put on the block, EMachines would be the second PC maker this year looking for a deal. Micron Electronics Inc. agreed last week to sell its PC division to Gores Technology Group in Los Angeles.
But in a sluggish industry in which more successful computer makers are finding it difficult to generate sales, EMachines might need to cast a wide net for a suitor.
“If EMachines manages to find a buyer, I don’t think they’re going to find one in the PC community,” said analyst Anne Bui of International Data Corp., a research firm.
“For a lot of the vendors right now, their problem is dealing with overcapacity,” she said. “Their factories aren’t really cranking to meet demand because there isn’t a whole lot of demand to meet.”
Indeed, the PC market is facing the biggest slump in its history. If sales continue to decline at the rate they have in recent months, analysts say, this year could mark the first time in two decades that annual industry sales dropped from the previous year.
EMachines had an ambitious start. It burst onto the scene in 1998, supplying low-end, low-cost home computers to retail stores and quickly capturing market share by offering PCs for as little as $399. It also tried to generate advertising revenue from an Internet portal for customers.
The company went public 14 months ago at $9 a share, but the stock began falling the first day to what is now penny-stock status. The stock jumped 18 cents, or 75%, Tuesday to close at 42 cents a share on Nasdaq.
The company’s profit margin and Internet ad revenue proved so small that it found itself ill-prepared to weather an industry slowdown. Even when sales were at their best, the company kept just 5 cents for every dollar of sales, whereas competitors were able to keep five times as much.
“What EMachines offered was a way to move surplus inventory at very low prices,” said Martin Reynolds, a PC industry analyst at Gartner/Dataquest.
The company ventured into the market for “more elegant higher-priced machines in order to push margins up, and that didn’t work so well,” Reynolds said. “EMachines’ strength was low prices and the ability to run off excess inventory. They may have lost sight of that along the way.”
The company lost $221.4 million last year as sales slumped 17% to $684.1 million.
For the first three months of this year, EMachines sold just 2.7% of the personal computers shipped in the U.S. market, according to IDC. That put EMachines in seventh place among U.S. computer makers, behind Apple Computer Inc.
Even though the rest of the industry also is slowing, EMachines’ position has slipped from the first quarter of 2000 when it held fifth place with 4.5% of the market share, Bui said.
In February, the company replaced its chief executive, co-founder Stephen Dukker, with Inouye, a former Best Buy Co. executive.
A month later, Nasdaq notified EMachines that the company’s stock would be removed because it hadn’t traded above Nasdaq’s $1-a-share minimum since Nov. 7.
EMachines has requested a hearing to appeal the delisting.
On Monday, the company said it hired five new senior managers.
Hiring a new slate of executives while trying to cut costs and possibly sell itself “is a little strange,” Bui said. The new hires would make more sense if EMachines “had some other business to fall back on,” she said.
Reynolds speculated that the hires could be an attempt to make EMachines seem more attractive to potential buyers.
“If you are going to sell the company, you’ve got to have something to sell,” he said. “Part of their challenge is showing you’ve got a competitive business model.”
