Update: Gateway to acquire eMachines

Purchase aimed at bolstering Gateway's shrinking PC revenue

Gateway Inc. plans to acquire eMachines Inc. for about $200 million to bolster its shrinking PC revenue while it pursues the consumer electronics market, the companies announced Friday.

The deal will provide Gateway with the revenue generated by eMachines' strength among consumers in retail channels, the companies said. EMachines sells low-cost PCs that have made inroads with U.S. consumers, who purchased enough PCs from the company to lift it into fourth place ahead of Gateway in the fourth quarter, according to market research from IDC.

Gateway Chairman and Chief Executive Officer (CEO) Ted Waitt will give up the CEO title to eMachines CEO Wayne Inouye, but will remain as chairman and will have an active role in Gateway's future, the company said. Inouye will also be named to Gateway's board of directors, it said.

The deal is comprised of 50 million shares of Gateway stock, and $30 million in cash. Based on the closing price of Gateway's stock Thursday of $4.09, the total deal is worth $234 million.

"This combination will create a company that has multiple brands, sells through multiple geographies and has a broad product line selling through multiple channels at the same time," Waitt said during a conference call with reporters.

Gateway has aggressively shifted its business during the past year from PCs to consumer electronics, especially digital televisions. Many PC companies think the higher growth rates of the consumer electronics business will allow them to grow as the PC market matures.

But while Gateway has successfully introduced a number of plasma and LCD (liquid crystal display) televisions, its revenue from PCs remains its single largest segment, and that segment has dropped steadily over the past year. During the fourth quarter overall revenue fell 17 percent and PC shipments declined 27 percent, while revenue from products other than PCs grew 39 percent compared to last year's fourth quarter, Gateway said Thursday in its earnings report.

The decision to acquire eMachines might show that Gateway de-emphasized PCs a little too quickly, before the consumer electronics market really got off the ground, said Stephen Baker, director of industry analysis for NPD Techworld in Reston, Virgina.

PCs with the eMachines brand will be sold only through third-party retail channels in the U.S. and in other countries around the world, the companies said. Gateway has not sold products outside the U.S. for several quarters.

Gateway also hopes to build on eMachines' channel strength by introducing more of its digital televisions and consumer electronics products into third-party retail stores, it said. Gateway currently operates about 190 retail stores around the U.S., and also sells products through its Web site.

"We want to combine our balance sheet strengths with eMachines' low-cost model to become a leader in consumer retail," Waitt said.

As a result of the acquisition, Gateway will "look very closely" at its retail stores, Waitt said. He declined to say if any stores would be closed as a result of a renewed focus on outside consumer retail channels.

Gateway has considered its retail stores an important part of its strategy to become what it calls a "branded integrator," or a company that sells a wide variety of electronics products. This year it closed some stores, and redesigned the remaining stores to emphasize its consumer electronics products.

"In the future, retail is going to play a role in how technology products are bought for a long, long time," Waitt said.

Gateway went back and forth last year on the need for low-price desktops. For a time, it wanted to focus on higher-priced products since it didn't believe it could compete with Dell Inc.'s cost strengths or Hewlett-Packard Co.'s retail presence. But it unveiled a $399 desktop in July, and Friday's announcement underscores how important low-cost products are to PC vendors, Baker said.

"EMachines is a very focused and very successful company by doing one thing and doing it well, selling low-price desktop computers through retail," Baker said.

After the acquisition is completed, Gateway expects to post a profit in 2005, it said. The deal is subject to regulatory approval, and is expected to close in six to eight weeks, the companies said.

Copyright © 2004 IDG Communications, Inc.