PARIS - Archos, the upstart French producer of touch tablets and MP3/MP4 players, is making waves again. Less than two months after it unveiled a new tablet-centric strategy, Archos announced a €26 million (possibly €30 million) capital increase aimed to boost the company's capitalization, currently at around €150 million. And sights are set on China.

Henri Crohas, Archos founder and CEO, has already indicated that the company wants to conquer the Chinese market. Part of this development strategy is the company's new entry level tablet brand Arnova, as well as new installations in China, including a new Research and Development center. For a company that has long built its fame on "made in France" R&D, this is quite a U-turn.

Now Archos seems determined to show that it can play in the same league as its Chinese competitors, which is a risky bet for such a small company. It is obvious that the French tablet maker would never dream of a direct confrontation with market leader Apple, maker of the iPad, but it is nevertheless set to exploit the giant's main soft spot: pricing. By offering tablets with a price tag below 400 euros, Archos is betting on a sales volume strategy. Crohas believes that tablets with a price ranging between 100 and 300 euros are likely to represent half of the 50 million products expected to be sold this year alone.

The other problem is that even if the overall sector meets growth forecasts, it is also one of the most competitive, which requires constant financial innovation.

But Archos' desire for a capital increase is also based on purely financial reasons. And that's where the shoe pinches. The company says it wants to "optimize its financial structure" by repaying in advance a €5 million loan at an annual rate of 20%, which was taken on in 2009 when the company faced serious financial difficulties.

In a general climate marked by investor fear of any risk-taking, markets promptly showed their reticence towards the French company's move on Tuesday, when its share value dropped 16 percent. The investors' distrust can be easily explained. First, there is the low price (6.50 euros) at which the new shares are sold, which marks a drop of 26.55% compared to the shares' value on April 15. Second, the move is not backed by any bank guarantee, and none of the shareholders -- not even Archos' CEO -- have shown their intention to buy any of the new equity.

Henri Crohas, holder of 16.31% of the company's capital shares, said yesterday that he had "no intention of taking part in the operation," even if "he intends to keep his share above the limit of 10%."

And third, it seems that Archos has been increasingly relying on capital increases as a main source of investment. The company has thus used this method to raise a total of €25.62 million euros during the last two years. But the loss in the relative value of shares that this kind of operation implies has every chance of annoying even its most loyal stockholders. Archos' turnover in 2010 was of €83 million euros, for a total loss of €2.3 million euros. The company had lost not less than €18.6 million euros only a year earlier.

Read the original article in French.

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