Sun, Feb 01, 2004 - Page 11 News List

Gateway to buy eMachines for US$30 million in cash


Gateway Inc said Friday that it would buy privately held eMachines Inc, for US$30 million in cash and US$50 million in Gateway stock, in a deal currently valued at US$266 million.

The deal, which comes one day after Gateway posted its 12th loss in 13 quarters, is the latest effort by the beleaguered company to stanch its losses and capture a bigger share of the market for low-end personal computers, which eMachines has shown rapid and consistent growth.

Word of the merger was well received on Wall Street, where Gateway stock rose US$0.63, or 15 percent, to US$4.72. Technology analysts viewed the merger as a positive move for both companies, but particularly for Gateway, which on Thursday posted a fourth-quarter loss of US$114 million, or US$0.35 a share, compared with a US$72 million loss, or US$0.22 a share, for the same period in 2002. Sales last year were US$3.4 billion, a 19 percent drop from sales of US$4.2 billion in 2002.

When the deal closes in the coming weeks, the combined company will become the third largest PC maker in the US market, behind Dell and Hewlett-Packard.

Wayne Inouye, the chief executive of eMachines, will become chief executive of Gateway and Ted Waitt, the founder and chief executive of Gateway, will remain the company chairman.

Industry analysts said the deal makes sense because it gives eMachines, based in Irvine, California, needed capital and access to a larger product line and gives Gateway, based in Poway, California, needed access to the low-price PC market and chain stores where eMachines has established relationships. This is important to Gateway because its own retail stores have done poorly.

"This gives Gateway flexibility in dealing with its stores and a new distribution channel," said Roger Kay, an analyst with IDC, a market research firm. "The stores have been a potential albatross. They won't abandon the stores immediately but now they have an exit strategy."

He said the deal would give eMachines access to Gateway's US$1.1 billion in cash. EMachines has been one of the fastest-growing personal computer makers in the US market, with US$1.1 billion in revenue last year and profitability for nine consecutive quarters.

Gateway, however, has continued to struggle despite several restructurings and after its renovation of its retail stores last year to compete with Best Buy, Sam's and other discount outlets.

The company's move into consumer electronics, like its new line of plasma televisions and digital cameras, has gone well but its PC sales have continued to decline, prompting some to predict that Gateway would have to leave the PC business eventually.

A Gateway spokesman, Brad Shaw, said the company would continue to sell its products through its stores and eMachines, which would remain a separate brand, would continue to be sold at big box retail outlets.

"We're still firmly committed to the PC business," Shaw said. "We've never said we would turn away from the PC and, if anything, creating this new relationship should validate that."

Shaw added that the eMachine deal would help shrink operating losses as Gateway moves through last year's restructuring effort. He declined to say whether layoffs or store closings would be necessary.

"Clearly, a big part of the strategy for creating a merger is to drive cost reductions," he said. "It's too early to speculate but the stores are something we continue to look at and evaluate on an individual and a channel basis."

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