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Inouye Contemplates Extending eMachines Tour Of Duty

Just a few months shy of his first anniversary as CEO of eMachines, Wayne Inouye is happier with his situation than he expected to be when he took the lead of the struggling PC maker.

“This has proven to be more interesting than I thought and I am rethinking my decision and may stay at eMachines,” said Inouye, who previously worked at Best Buy and The Good Guys. He replaced eMachines co-founder Stephen Dukker who was ousted by the board of directors when the company fell out of contention in the PC market.

In February 2000 he agreed to a one-year contract saying his goal was to bring the company back from the brink of destruction and then head off to another challenge. Instead Inouye is presiding over a company that is being sought for purchase by one of its board members, expects to post a profit for its next quarter and has ambitious plans to launch an online store.

On Nov. 9 the entry-level PC maker confirmed that EM Holdings, a Taiwanese high-tech firm, had offered to buy out the company for an estimated $117.5 million. Lap Shun (John) Hui, owner of EM Holdings, tendered an offer late last month to purchase eMachines. The PC company confirmed the offer last Friday saying EM Holdings was willing to pay $0.78 per share for eMachines, well more than the 43 cents per share at which the company was trading. The PC maker has retained Credit Suisse First Boston to consult on the potential deal.

“Our board, with the help of its advisors, will evaluate any and all offers that we receive,” Inouye said, adding that despite the prominence of the potential buyer there is no assurance that eMachines will agree to the buyout.

None of this would have been possible if Inouye and his management team, which includes Brian Firestone as executive vice president for strategy and business development, did not get the eMachines’ house in order. Ten months ago eMachines was saddled with a mass of extra inventory and had fallen out of contention in the U.S. PC market and was even delisted from the NASDAQ exchange.

The reason for this downfall was that the original business plan the company operated under was flawed, Inouye said.

“The idea was to make cheap PCs and make the profit on Web services. We were to sell Internet hot buttons on the keyboard and hard drive space to Web companies. This Web business just did not work and the infrastructure to support this model was more expensive than anticipated,” he said.

On top of this eMachines suffered from a very high return rate because it did not offer any customer service, so people with a problem simply brought the units back, Firestone said.

“We had been written off by the industry,” Inouye said.

To try to salvage the company the team started from scratch.

“We developed a new business strategy and essentially launched a new company,” Inouye added.

Instead of counting on fees from Web services to be profitable, eMachines would make its money strictly on selling hardware — not an easy task in a market where the PC has become a commodity and the company’s least expensive model costs a rock bottom $399.

The company also will take on some of Dell Computers’ practices to gain a profit. This includes tightly controlling inventory and setting up an online store that went hot two weeks ago. Firestone said eMachines will stick to suggested retail pricing at its store. In addition to PCs, the site will carry a range of branded accessories.

To reverse the returns problem Inouye instituted a customer care program. “We are really focusing on first-call resolution of problems,” Firestone said, adding eMachines’ customers have a course of action besides simply returning something because they could not get it to operate.

One of the ole eMachines’ business practices that Inouye has retained is pricing. He has kept the feature-packed entry-model priced at $399. But since this offers little margin, the company wants to see stores do a better job of upselling the customer to mid- and higher-end PCs.

The company is even getting some outside help. The proposed acquisition of Compaq by Hewlett-Packard is giving eMachines a huge boost. Several retailers stated that if the deal is closed their stores would basically be left with one major brand to sell, which is never good for business.