How did GTW go bad so fast?
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Gateway's Got to Fix Itself, Even if Just for a Fire Sale
By Jim Seymour
Special to TheStreet.com
Originally posted at 1:01 PM ET 3/1/01 on RealMoney.com
This Gateway (GTW:NYSE - news) affair in San Diego Wednesday certainly produced bad news aplenty for Gateway holders. We're seeing the inevitable morning-after hangover on Thursday, with Gateway down 10% preopen on Instinet, and in late morning around $16 (and likely to fall further) on the NYSE.
It wasn't the big miss -- earnings flat rather than the 17-cents-per-share consensus forecast for the first quarter of 2001 -- so much as the coming restatement of earnings for the first three quarters of fiscal year 2000 that really worries me. Restating earnings opens dozens of cans of worms, many unexpected and all invariably ugly.
Even with that, I suspect a little too much is being made of the Gateway miss and reorganization. Jim Cramer worried online Thursday morning, for example, that Gateway may not be able to pull out of this "tailspin." And many analysts are wondering whether founder and CEO-again Ted Waitt's return to the company is really an effort to clean things up for a semi-fire sale.
I'm not worried about Gateway pulling out and surviving, but a sale seems entirely possible. Remember about five years ago, when Waitt came within a hairbreadth of selling the company to Compaq (CPQ:NYSE - news)? His cash-out would have been about $2 billion, and I've often wondered if Ted has since regretted his last-minute decision to bail on the sale. Despite the increase since then in Gateway's value -- its market cap is around $5 billion, but as recently as September was almost five times as much -- Ted could have had that $2B free and clear, paid the taxes and lived the good life in Southern California that he has said he's seeking.
Gateway insider sales over the past year have been dominated by cash-out sales by Waitt. Many of those sales have been small, but others have been whoppers. By rough count, it looks as if Waitt has cashed out of at least a half-billion dollars in Gateway stock over the past eight months alone. (That's highly approximate: Remember that insider-trading data is often soft and inconclusive.)
That isn't intended as criticism -- Waitt has a right to do whatever he wishes with his money; diversification is always a good thing, and Waitt has given a fair amount of that money away -- but it may indicate a little less, shall we say, passion for running the business than he showed a few years ago.
But who would buy? That's one of the problems in this beaten-down boxmakers' market. The only plausible buyers, other PC makers, are pretty bruised themselves -- and could probably find better things to do with their remaining capital and free cash flow than to buy a fellow ailing PC maker.
(Why not companies outside the PC industry? Aside from questions about how much they'd need to learn to fix Gateway -- and indeed, questions about whether, in this declining PC sales environment, it is fundamentally fixable on its own initiative -- they surely have better uses for capital than the $6B or so it would take to buy Gateway today.)
In the PC world, both Michael Dell personally and Dell Computer (DELL:Nasdaq - news) itself could certainly afford to buy Gateway ... but it would have to be a market-share consolidation move, and I don't think either Michael Dell's personal advisers or Dell's shareholders would think much of the idea. In a contracting market, the value of that nth slice of market share contracts as well.
Down the road a little from Dell, Compaq could also afford the buy but would face the same issues as Dell.
Moreover, for either company, and for any other major PC maker -- there are rumors Thursday morning about Hewlett-Packard (HWP:NYSE - news) and IBM (IBM:NYSE - news) having some interest, as well -- there are antitrust issues. The Federal Trade Commission is likely to look askance at any of the top five PC companies acquiring Gateway. And a nasty, highly public yearlong battle with the FTC is not what any of these companies need right now.
So Gateway may well have to fight its way out of this box by itself. By reducing sharply its recent focus on the alluring but evasive "beyond-the-box" revenue the company had been pursuing under CEO Jeff Weitzen, and getting back to the grind-it-out basics of selling bargain-priced PCs, Gateway can probably endure long enough to dig out of this hole.
As with its competitors, it will be a smaller and less profitable company, with a far smaller market cap than it has historically enjoyed. The multiple-compression that has been afflicting its competitors will hit Gateway even harder. And keeping talented people in a time of near-valueless options and a murky future is always hard.
I don't believe what began as an optimistic outlook seance in San Diego Wednesday and then turned very sour marks the end of a great PC company. But it may have marked the beginning of a new and sharply diminished one.
For investors, the obvious: You don't want to be in Gateway. Then again, you haven't wanted to be in Gateway since at least last November, when it suffered that heart-stopping fall from $51 to $19 in a month.
Bottom-feeders convinced Gateway (and the PC market as a whole) will come back may want to acquire some shares, but I'd wait till more of the pain is over. Salomon Smith Barney set a price target of $13 for Gateway Thursday morning, and that sounds about right to me, if rough on Gateway holders. Picking up additional shares, or starting a new position, much above $13 looks foolhardy to me. But shorting down now also looks risky: you have to be betting on unexpectedly bad results from those three quarters of restated earnings.
Gateway's been good for some investors, and good for the PC marketplace. It makes sound PCs, sometimes innovative ones, sells them at attractive prices and these days supports them well. The question now is whether that's enough.
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Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour had no |
