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Gateway to Acquire EMachines

California

The $266-million cash and stock deal would create the third-largest computer maker in U.S.

January 31, 2004|Terril Yue Jones | Times Staff Writer

Money-losing Gateway Inc. said Friday that it would acquire privately held EMachines Inc. in a cash and stock deal valued at $266 million, creating the country's third-largest computer maker.

The deal would give Gateway, which has been losing money and market share in its core computer business, access to expanded retail distribution through EMachines' links with huge electronics chains such as Best Buy Co. and Circuit City Stores Inc.

In return, profitable EMachines would be able to tap some of the $1.1 billion in cash and marketable securities that have kept Gateway afloat through three straight years in the red.

EMachines' chief executive, Wayne Inouye, would take over that title at Poway, Calif.-based Gateway, and Gateway founder and CEO Ted Waitt would become chairman. No decision has been made about cutting Gateway's workforce of 7,500 or EMachines' already lean roster of 138.

The deal represents a shift from Waitt's recent strategy of reducing Gateway's reliance on PCs by expanding the company's lineup of higher-margin consumer electronics offerings like digital cameras and flat-screen televisions. Sales of such devices accounted for 31% of Gateway's fourth-quarter revenue, while PC sales fell 27%.

Some analysts questioned whether Gateway can save itself by bulking up its PC division.

"The big question is, does the PC business contribute to the bottom line?" said Ashok Kumar, a technology analyst with investment bank U.S. Bancorp Piper Jaffray. Even computing giant Hewlett-Packard Co., which paid $19 billion for rival Compaq Computer Corp. in 2002, "has shown that it can break even at best," he said.

But other analysts welcomed Gateway's return to its PC roots.

"I think they've lost some focus and presence in that category, and their sales numbers show that," said Stephen Baker, a senior analyst with market researcher NPD Group.

Together, Gateway and Irvine-based EMachines sold enough PCs in the U.S. last year to capture 7% of the market. That would have been good enough to take the No. 3 spot from IBM Corp., according to market researcher IDC. Dell Inc. held the top spot last year with 31% of the U.S. market, and HP was second with 22%.

The deal, announced Friday morning, drove Gateway shares up 63 cents, or 15%, to $4.72 on the New York Stock Exchange.

In a conference call, Waitt said the acquisition would help Gateway reach more customers in more kinds of stores and allow the company to offer a wider variety of brands and products. Gateway currently operates 189 retail stores, while EMachines sells through electronics stores as well as Wal-Mart stores.

The deal could allow Gateway to "scale down its store count," which would save money for the combined company, Steven Fortuna, a technology analyst with Prudential Equity Group, said in a research note to clients.

In addition, Gateway would pick up EMachines' distribution channels in Japan and Western Europe, Waitt said. Gateway withdrew from overseas markets in early 2001.

EMachines would gain badly needed cash to fund its expansion, said Inouye, who spent 25 years with Good Guys and Best Buy before joining EMachines.

The company, which had an initial public offering in early 2000 and was taken private in late 2001, had considered another public offering but decided to merge with Gateway instead.

"Gateway's a great brand and they've got a lot of money," Inouye, 51, said in an interview. "What's better than that? Money helps you grow."

Under the terms of the deal, EMachines owner John Hui would receive 50 million Gateway shares and $30 million in cash. The deal, subject to antitrust approval, is expected to close in six to eight weeks.

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