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Gateway gobbles eMachines

In its latest attempt to find profits in the notoriously low-margin personal computer business, Gateway Inc. will buy privately held eMachines Inc. in a deal valued at $235-million.

The combined company would still trail Dell Inc. and Hewlett-Packard Co., but executives hope the increased volume will give it more leverage in negotiating with suppliers. A similar argument was made when HP announced it was buying Compaq Computer Corp. in 2001.

"There's an element of "last man standing' here," said Roger Kay, an analyst at the research firm IDC. "The PC industry is definitely consolidating and, at this stage, bulk counts."

Gateway and eMachines each had about 3.4 percent of the total U.S. market in the fourth quarter of last year, according to IDC. By comparison, Dell and HP commanded more than half.

The agreement announced Friday came a day after Gateway posted its 12th loss in 13 quarters, a result of sharply declining sales and charges related to its makeover from a personal computer maker to consumer electronics company.

Gateway's revenue last year was little more than one-third what it was in 2000. The company introduced a raft of flat-panel TVs, cameras and music players last year, but lackluster holiday sales failed to validate its gamble to branch into consumer electronics.

Last year, Gateway's PC shipments fell 24 percent to just under 2.1-million units. EMachines shipped 1.9-million PCs last year, meaning the transaction would effectively double Gateway's PC business.

Ted Waitt, who founded Gateway in 1985 and returned as chief executive in 2001, said skepticism from analysts about the future of the company's PC business, which still accounts for about 70 percent of its revenue, "basically gets answered" by the acquisition.

Once the deal is closed in about six to eight weeks, Waitt will be replaced by eMachines' CEO, Wayne Inouye. Waitt, 41, will remain Gateway's chairman. Inouye, 51, was senior vice president of computer merchandising at Best Buy Co. before joining eMachines in 2001 to turn around the then-struggling company.

The two companies, which began negotiating about a month ago, have targeted different customers. EMachines employs only 138 people, mostly in Orange County, hiring outside firms and selling its lower-end PCs through major electronics retailers, including Best Buy, Circuit City Stores Inc. and Wal-Mart Stores Inc.

Gateway said it had no plans to carry the eMachines brand in its stores and hasn't approached eMachines' retailers about carrying the Gateway brand.

Gateway, which employed 25,000 people in 2000, recently stopped manufacturing its products _ except for some large, custom accounts _ and hired outsiders to handle everything from shipping to employee benefits.

Waitt will remain Gateway's largest shareholder with a 28 percent stake, down from 32 percent currently, said Gateway spokesman Bob Sherbin. John Hui, eMachines' chairman and largest shareholder, would become Gateway's second-largest shareholder, with 13 percent.

Also, eMachines will get 50-million Gateway shares, valued at $204.5-million at Thursday's closing price of $4.09 on the New York Stock Exchange, and $30-million cash. Shares closed at $4.72, up 63 cents _ an increase of 15 percent.

EMachines, based in Irvine, had revenue of $1.1-billion last year and has been profitable for nine straight quarters. The company declined to provide additional financial information.

Gateway, based in the San Diego suburb of Poway, had revenue of $3.4-billion last year. It said it expected to return to profitability in 2005.

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