| | UPDATE: Gateway's Buy Seen Expanding Retail Opportunity
By DONNA FUSCALDO
Of DOW JONES NEWSWIRES
NEW YORK -- After watching sales of its personal-computer business dwindle for three consecutive years, computer maker Gateway Inc. (GTW) has decided to fight back.
In an unexpected move, the Poway, Calif., company announced earlier Friday, that it agreed to acquire closely held PC maker eMachines Inc., for roughly $235 million in cash and stock. Once-public eMachines has carved out a niche in selling cheap computers, at such retailers as Best Buy Co. (BBY), Wal-Mart Stores Inc. (WMT) and Circuit City Stores Inc. (CC).
Under the terms of the deal, Gateway will pay $30 million in cash and 50 million shares. The company expects the purchase to morph Gateway into the No. 3 player in the U.S. PC market.
While Gateway CEO Ted Waitt, who will become chairman of the combined company, told Dow Jones that Gateway could have bought eMachines for cheaper a year ago, the price decided on was fair for both sides. Wayne Inouye, the current eMachines CEO, a former Best Buy executive, will become CEO of the combined company.
Gateway, which made its name as a direct seller of PCs in the 1990's, has been on a mission to transform the struggling company and return it to the ever elusive profitability.
In May the company announced a new strategy to make a slew of branded consumer electronics and not focus solely on PCs. But PCs still make up the lions share of the company's revenue and was the major contributor to its fourth-quarter loss of $11.3 million, or 35 cents a share, which Gateway announced late Thursday.
With the purchase of eMachines, Gateway expects to report a profit in 2005. Unlike Gateway, eMachines has been profitable for nine straight quarters aided by its low cost model. Some analysts say this model is even more efficient than Dell Inc. (DELL), which is famous for churning out PCs on the cheap.
EMachines posted over $1 billion in revenue and shipped 1.9 million computers last year, nearly in line with the 2 million Gateway shipped in the same period.
By buying eMachines, Gateway and analysts argue the company will expand its distribution channel and be better able to compete at the low end of the market.
"Gateway's biggest problem is the channel," said Rob Enderle, an analyst at Enderle Group. "Gateway has its stores and online. It doesn't have the breadth that a H-P has in retail."
As Gateway pushes further into the consumer electronics arena, Enderle said eMachines' retail relationship will allow it to not only sell PCs but other electronics gear.
"EMachines is all over retail; this solves the channel problems for them right off the bat," said Enderle.
Gateway's incoming CEO Inouye,declined to comment on whether the eMachines brand will extend past the PC. During a conference call with reporters he did note that eMachines has been "very focused" in the desktop and notebook markets. "What will happen in the future will be determined in the future," said Inouye.
In a subsequent interview with Dow Jones, Gateway's Waitt said the most likely scenario is that eMachines' PCs will be sold at retailers along side Gateway branded consumer electronic products. Higher-end Gateway branded PCs would likely be sold in its Gateway stores, he said.
Waitt noted that he has always believed in a multichannel strategy and that Gateway will carefully consider the best ways to optimize the two companies. He declined to comment on whether layoffs will be in the cards for Gateway or eMachines employees.
Still while Gateway will clearly get more shelf space in retail stores with the purchase of eMachines, as well as a strong player in the low-end of the market, Stephen Baker, an analyst at The NPD Group, wondered why Gateway couldn't go out on its own and strike up deals with retailers, similar to its relationship with Costco Wholesale Corp. (COST) and on the Home Shopping Network.
Gateway could have done it alone, said Baker, noting that Gateway isn't blindly going into the retail channel. "People know who they are," he said.
During the conference call Waitt said Gateway could have cultivated the relationships with retailers, but that it would have taken time. "I think this is a much better way to do this," said the executive. Plus, he said Gateway will have the benefit of having additional brands in the "combined arsenal."
EMachines has an "impressive model," said Waitt, noting that the low cost structure coupled with its retail relationships makes buying eMachines a "win win scenario."
Investors seem to agree with that sentiment. Recently shares of Gateway were trading up 7.6% or 31 cents, to $4.40, on heavy volume of 5.6 million shares. Average daily volume is 2.9 million shares.
-Donna Fuscaldo; Dow Jones Newswires; 201-938-5253
donna.fuscaldo@dowjones.com
Updated January 30, 2004 12:50 p.m. |
|
