Gateway To Buy Low-Cost PC Maker

Monday Feb 2nd 2004 by Colin C. Haley
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Faced with slipping market share, the computer maker shifts strategy to create the third-largest PC company in the U.S. The deal helps answer questions about Gateway's commitment to the PC market in the face of slipping market share.

In a bid to stem its losses and bolster its low-cost PC offerings, Gateway is buying eMachines for about $235 million in cash and stock.

The deal — consisting of $30 million cash and 50 million Gateway shares — creates the third-largest PC company in the United States (behind Dell and Hewlett-Packard) and the eighth-largest in the world.

The deal helps answer questions about Gateway's commitment to the PC market in the face of slipping market share and an aggressive push into consumer electronics.

The acquisition, which is expected to close by the end of the first quarter, comes amid a losing streak for Gateway, which saw sales slip and took charges related to its rollout of consumer electronics products.

During the fourth quarter of 2003, Gateway reported a net loss of $114 million, or 35 cents per share, on revenues of $875 million. The loss included a $65 million charge related to restructuring and transformation expenses stemming from its previously announced outsourcing, the company said.

In the prior quarter, it lost $139 million, or 43 cents per share, and $72 million, or 22 cents per share, a year earlier.

For 2003, Gateway reported a net loss of $526 million ($1.62 per share) on revenue of $3.4 billion. Again, the loss included restructuring costs. Total PC sales for the year were 2.1 million, a 24 percent decline over the prior year.

eMachines sold 1.9 million computers (desktops and notebooks) last year, just 100,000 shy of Gateway. And most of those were under $800, a fast-growing category. Gateway plans to keep both brands.

But the privately held company was attractive for other reasons. Chief among them, relationships with a dozen high-profile retailers, including Best Buy, Office Depot and Wal-Mart.

Gateway wants these stores to sell its flat-screen TVs and DVD players, which it sees as a growth area, despite mounting competition from Dell and others. To date, the company has sold direct and through its nearly 200 "Country Store" retail outlets.

eMachines' retail contacts aren't restricted to the United States. The Irvine, Calif., company also has agreements with chains in Japan, the United Kingdom and Western Europe, areas where Gateway pulled back during the economic slump.

"A return to the international arena is something we've been looking at for several months," Gateway founder Ted Waitt said in a conference call with analysts.

Gateway officials conceded that details of the retail strategy are still being worked out. The company said it would be examining its Country Store strategy, which carries high overhead, but said no decisions had been made.

Other factors in the acquisition were eMachines "lean" operating model, which has produced $1.1 billion in revenue last year and string of nine consecutive profitable quarters during difficult times for the PC industry.

In addition to gaining efficiencies by adopting eMachines processes, Gateway expects to save money on computer components because of its increased purchasing power and on consolidating supply chains.

Gateway, of Poway, Calif., also gains new leadership. Waitt has been so impressed with eMachines' CEO Wayne Inouye that he named him CEO of the combined company. Waitt will remain as chairman. Inouye has significant experience in the retail sector, having served as senior vice president of computer merchandizing for Best Buy.

Investors reacted positively to the move, sending Gateway shares up more than 10 percent to $4.54 in early Friday trading.

Adapted from internetnews.com.

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