Our pal Kumar
Looks like ole pal ashok has "shot himself in the head." Too bad, I guess the old adage "you reap what you sow" lives on. Is anybody surprised by this?
Have a great holiday all, we have much to be thankful for
BW ONLINE DAILY BRIEFING
NEWS FLASH November 25, 1999
When Market Analysts Attack
Did this one change his tune on eMachines Inc. just because he didn't get a cut of the IPO?
Ever wonder what makes a Wall Street analyst go negative on a stock in today's high-flying high-tech sector? Try cutting his firm out of an initial public offering. Fellow analysts are wondering if that's what happened with U.S. Bancorp Piper Jaffray's Ashok Kumar, judging by the way Kumar went from high praise to vitriolic criticism of PC maker eMachines Inc. almost overnight.
Early last spring, Kumar, who is a frequent chat guest on Business Week Online, was publicly praising eMachines, a maker of sub-$600 PCs which had vaulted from startup to No. 3 in U.S. sales in six months. In March, Kumar told Business Week: "eMachines has created a brand-new model. The [PC] big boys need to be careful." And privately, he was pleading with eMachines' CEO Stephen Dukker to underwrite the deal. He hosted an elaborate welcome for Dukker at Piper Jaffray's Minneapolis office, complete with face time with CEO Addison "Tad" L. Piper, says Dukker.
When word got out that Dukker was close to deciding which underwriters to use -- he subsequently chose CS First Boston, BancAmerica Robertson Stephens, and Hambrecht & Quist -- Kumar called him repeatedly, Dukker says. "It got to the point in April and May that I didn't want to answer my cell phone," says Dukker.
DRAMATIC CHANGE. On May 10, Kumar sent an e-mail -- or plea-mail, as Dukker calls it -- asking for just 10% of the deal. "That itself should be indicative of my sincere interest in your story," he wrote in the e-mail, provided to Business Week by Dukker. "I have known you and supported your story longer than all the analysts on the [deal] put together." When Dukker still refused, he says Kumar proposed that Piper do the deal for free, just for the name recognition. Kumar denies this, saying: "To my knowledge, we've never ever done any deals for nothing. Why would we?"
After Dukker's rebuffs, Kumar's public pronouncements about eMachines changed dramatically. On June 1, just three weeks after the analyst had sent his e-mail, he wrote a scathing report saying that "we do not believe that [eMachines'] retail-focused business model is sustainable.... This business model has all the makings of sucker.com!" When asked by Business Week a few days later whether eMachines would be able to pull off its IPO, Kumar said: "I'm sure they can push it down some [investors'] throat at the right price.... The suckers bring the money, while Wall Street lights the match."
On Sept. 20, he followed up with a report suggesting that eMachines' corporate structure -- the company is co-owned by Korea-based Trigem USA and Korea Data Systems -- hides necessary financial data, such as inventory figures, from would-be shareholders. "With the Korean parent companies assuming all the trade and credit risk, eMachines is pushing the boundaries of FASB-approved accounting," Kumar wrote.
Why the dramatic change of heart? Kumar, who is well-known for having good sources of information, says plenty had changed. He points out that PC heavies Compaq Computer Corp. and Hewlett-Packard Co. had begun selling PCs for as little as $599 around that time, largely wiping out eMachines' crucial price advantage. And he says he got word that America Online planned a big investment in PC rival Gateway (which occurred on Oct. 20), thereby wiping clean the "halo effect" created when AOL invested $50 million in eMachines on June 17.
EMACHINES' WOES. Dukker says it would have been impossible for Kumar to have all this information. The eMachines CEO says his discussions with AOL didn't start until early June -- after Kumar's report. But Kumar says the once-rosy prognosis for eMachines had begun to look problematic. "The company can point fingers at me, but the landscape changed," Kumar says. "I've tried to build a reputation as a non-biased analyst, and sometimes you have to step on some toes."
Indeed, Kumar may be more right than wrong about eMachines' chances now. The company was sued by Compaq for patent infringement in July. And a Tokyo Court upheld a preliminary injunction in a trademark infringement suit filed by Apple Computer on Sept. 20 regarding eMachines' eOne PC, which allegedly bears a strong resemblance to Apple's iMac. Given eMachines' razor-thin margins -- it lost $3.9 million on sales of $351 million in the first six months of this year, according to its Aug. 31 filing to go public -- it will be sorely tested by any courtroom losses or big legal bills.
And eMachines' problems aren't just in court. While it had planned to bolster its minuscule PC profits with cushy margins from its eMachines Network Net service, few analysts think the plan is feasible, given the rise of free or heavily discounted offers from AOL and others. Initially, Dukker had said the company would focus on sub-$600 models, but it recently announced a $999 laptop and a higher-end $899 PC.
Some analysts think the company's business model is under pressure. Dukker says he decided to go upmarket when IBM and Packard Bell NEC recently pulled out of the U.S. consumer market, leaving it more up for grabs. Its IPO, which was originally planned for around September, now isn't expected until early next year.
BACKFIRE? Still, few observers are buying Kumar's explanation for his rapid-fire about-face. A rival analyst says Kumar has a reputation for making headline-generating negative calls on companies. Another analyst says Kumar's negative reports could backfire. "There are no saints on Wall Street, but every analyst has worked very hard on deals and had the door slammed in their face," he says. "That doesn't mean you write negative articles." Still, Kumar insists that the recent change in his view on eMachines is unrelated to the firm's decision not to use Piper Jaffray to underwrite its IPO.
Meanwhile, some analysts question why Kumar would be writing about the company at all, since eMachines isn't yet public. "What's the point, since they don't have any stock?" asks a rival analyst. Retorts Kumar: "I cover the PC industry, and [the low-cost PC] is a major trend. How could I not write about it?"
Good question. And here's another one: What would he be writing now if Piper Jaffray had gotten its part of the deal?
By Peter Burrows in San Mateo, Calif.
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