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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | JUNE 10, 2003 TRENDS By Karen E. Klein In Praise of the Reverse IPO When the Street spurned eMachines, the board bought out stockholders, went private, and regained a startup's freedom and fire
The problem boiled down to a matter of timing: eMachines' initial public offering took place in March, 2000, immediately before the tech wreck and the start of the capital markets' three-year fall. Initially priced at $9 a share, the stock never closed above that figure. With the general decline in the market and the downturn in the global PC business, eMachines' stock plummeted during its first year as a public company. By the time Inouye learned his outfit was about to be delisted, it had bottomed out at just $0.14. FRUITLESS QUEST. Despite having sold more than 4 million PCs since it opened for business in November, 1998, things didn't look good for eMachines, a primary supplier of computers to Best Buy, Circuit City, and other national retailers. Throughout 2001, Inouye was scouting merger and acquisition opportunities, but after 55 contacts, he concluded there was simply no interest to be found. Enter Diana Maranon, founder and managing partner of Averil Capital Markets Group in Los Angeles, a boutique investment banking firm. eMachines director Lap Shun "John" Hui had been in discussion with Maranon about alternatives and, in late 2001, she suggested one: Why not take the company private? Maranon said she could arrange to have shareholders bought out for $161 million, secure $145 million in debt financing to bankroll the deal, and return eMachines to privately held status. Hui liked the sound of that. "If you're not going to be valued by the marketplace, why go through the regulations and reporting requirements of a public company?" Inouye says. "The requirements are onerous and time-consuming, and the benefit of private ownership is being able to operate without the reporting required of a public company." Going private was a relatively quick process, Inouye says, even though thousands of individual shareholders had to be contacted for what amounted to a reverse IPO. The buyout offer was presented in October, and the company was in private hands by the end of December, 2001. "DRAMATICALLY DISCOUNTED." Inouye didn't know it at the time, but eMachines may have been part of a trend that is reversing the norms of the 1990s boom: Small but solid companies -- ones that probably should never have gone public in the first place -- are returning to their roots. "The markets are so frothy during boom times that a lot of smaller companies jump into the public sector because they can get better valuations there," explains Peter Cowen of Peter Cowen & Associates, an investment bank based in Westwood, Calif. "Once times changed, they found that the markets put little value on their equity and they were being dramatically discounted solely due to their size, notwithstanding their performance. Abandoned by institutional investors, they became orphans."
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