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Packard Bell NEC primes for IPO

Packard Bell NEC has money in the bank to shore up its operations, but still faces challenges as it eyes an initial public offering next year.

Packard Bell NEC has money in the bank to shore up its operations, given the $300 million infusion it received from investors yesterday, but the computer maker still faces challenges as it eyes an initial public offering next year.

Packard Bell NEC encountered weaker-than-expected financial performance this year, and saw its unit shipments decline in the third quarter as those of its competitors rose. The company, the product of a merger between Packard Bell and NEC in June of 1996, now faces the prospect of going public in a market that has seen the number and value of high tech IPOs cut roughly in half this year over the previous year. Worse still, the valuation of computer-related stocks in general may plateau in 1998.

A snapshot of the company's financial picture reveals that, over the course of two years, NEC has invested $1.3 billion in the company. Even so, Packard Bell NEC's outlook persistently has been bleaker than expected.

The PC maker generated $5 billion in revenues this year, said Seijiro Yokoyama, a senior executive vice president at NEC. But that's about a 37 percent shortfall compared with earlier projections.

When NEC announced it would merge its international PC operations with Packard Bell, the companies expected the newly created Packard Bell NEC to crank out $8 billion in revenues in its first full year of sales. But competition and pricing pressure eroded those plans as Compaq

and Hewlett-Packard significantly cut into Packard Bell NEC's market share for low-priced units.

Though the company has seen profitability in some portions of its business, its overall operations were not profitable this year, marking another consecutive year of losses, Yokoyama said.

Faced with this weak performance, Packard Bell NEC hopes to turn things around with its $300 million investment. The funds will go toward daily operations, as well as toward funding the call center for its newly launched custom-build direct sales business, said Luis Machuca, executive vice president and general manager of NEC.

Meanwhile, the company's domestic shipments fell by 7 percent during the third quarter, compared with an increase of more than 60 percent by competitors, according to IDC Research.

Outside of trying to turn around its own financial performance, Packard Bell also will have to contend with related and equally tenuous issues like market conditions and investor sentiment toward technology IPOs as it prepares to go public next year.

Technology IPOs this year generated $6.54 billion with 147 deals, compared with $13 billion for 244 deals during the previous year. Even though volume was cut in half during the course of only a single year, IPO analysts maintain that the economy is positioned to turn 1998 into a successful year.

Asia is expected to continue to be a drag on the market, but Wall Street underwriters like Rob Keller with Hambrecht & Quist nevertheless expect good earnings growth from tech companies in 1998.

But analyst Richard Schutte with Goldman Sachs said in a report that PC vendors face an uphill climb if they are to maintain the growth pace and volume of better-than-expected earnings that Wall Street has come to anticipate from tech stocks.

"Some disappointments, slowing growth...and increased concerns about a heightened competitive environment will likely place a cap on the stocks in 1998," Schutte said in his report. "However, we are confident about the fundamentals, and believe that each PC vendor has unique challenges and opportunities. Execution will be the key."

Reuters contributed to this report.