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Power Computing IPO at risk

The clone maker is fighting tooth and nail with Apple over licensing of the latest Mac OS.

Power Computing, the largest Macintosh clone maker, is facing a tough road ahead for its initial public Macworld saga offering, as it leads a vocal fight with Apple Computer (AAPL) over licensing the latest Macintosh operating system.

Executives at Power, which has seen rapid growth, vented their frustration at this week's Macworld Expo in Boston. Apple is threatening Power's livelihood on a number of fronts.

Joel Kocher, Power's president, brandished the company's prototype open-platform Macintosh-compatible laptop to the Macworld audience on several occasions. Alhough the product is ready, Kocher said, it will not see the light of day unless Apple approves it, an increasingly unlikely scenario given the enmity that exists between the two companies. The Mac clone notebook market is a potentially large market for a relatively small company like Power Computing.

Moreover, Apple has yet to finalize negotiations for licensing the Macintosh OS 8 operating system with Power Computing--or any of its other clone vendors, for that matter. At issue, among other things, is a sliding licensing fee scale, sources close to Apple say. Power Computing has been particularly vocal about the higher fees becuase they would make the company less competitive and less profitable.

Marketing executives from Power have been feuding with Steve Jobs over the past few weeks, according to sources familiar with the situation.

Power, which is in a quiet period, still has its IPO plans in play and has not withdrawn its offering, a company spokesman said. He declined to comment on whether the licensing fight with Apple was having an effect on Power's IPO efforts.

Underwriters for the Power Computing IPO are Prudential Securities and Salomon Brothers.

Prudential said although the offering was initially expected to be priced in late August or early September, the recent, sudden rise of Apple's stock has prompted the pricing schedule to be put on hold with a date to be announced later.

The company has filed to float out an offering of 3 million shares with a pricing range of $8 to $10 a share. That would raise as much as $30 million in capital for the fast-growing company and give it a market value of up to $177.2 million.

"You have to imagine that the licensing impasse might have chilling effect [on Power's IPO]," said Lou Mazzucchelli, a financial analyst with Gerard Klauer Mattison. "I think Power potentially has more to lose than the other cloners because Power is not ready to compete in the Wintel market yet and they are not ready yet to give up Mac OS revenue base yet," But, he adds, "Apple is not necessarily the bad guy in this."

The clone maker has revealed plans to develop machines for the Microsoft-Intel platform as well.

Some fund managers said Power already faces a challenge in attracting investors because its close ties to the troubled Apple.

"My sense is that the whole Apple platform has major problems and, so, do I want to buy into a subset of [Apple]?" asked one small-cap fund manager, who added that the licensing problems Power is currently facing are the lesser issue for him.

Power filed its IPO registration statement on June 30. Generally, companies floating out IPOs set their target price within a six- to eight-week span after the registration is filed.

The Mac OS 8 is an important release for clone vendors. The Common Hardware Reference Platform (CHRP), supported in Mac OS 8, is a key technology that will allow Mac clone vendors to independently enhance system performance and compete even more aggressively against Apple.

But while the original goal of licensing was to expand the Macintosh market, that clearly has not happened, Mazzucchelli says. Clone vendors have been taking sales of high-margin systems from Apple, causing Apple to reconsider its licensing position. This problem will only increase with the advent of CHRP systems, so Apple is trying to get as much money out of OS licenses as it can.

"The spirit of the original licensing agreement is that cloners would bring [the Mac platform] to new places. It's unclear that that's a basic business model Apple can profit from. From Apple's point of view, they have a responsibility to shareholders to not lose money on these transactions," Mazzucchelli says. "They want to encourage licensing in a way that isn't detrimental to their business. But there may not be a way to [expand the market] because of Microsoft's dominance of the operating system market," he added.

Apple this week announced a $150 million investment from Microsoft and an agreement to use each other's patented technology. Apple also rolled out an almost completely new slate of board members.

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