Struggling computer maker Gateway Inc. is acquiring its privately held rival, eMachines Inc.
The deal is valued at $30-million (U.S.) in cash plus 50 million Gateway shares. Based on Gateway's Thursday closing price of $4.09 on the New York Stock Exchange, the deal is valued at approximately $234.5-million.
Under the deal, Wayne Inouye, eMachines' chief executive officer, will become CEO of Gateway and will be named to Gateway's board of directors. Roderick Sherwood III will remain Gateway's chief financial officer. Ted Waitt, Gateway's founder, will remain chairman of the board.
Gateway's share of the PC market in the United States slipped to 3.4 per cent in the fourth quarter of 2003 from 5.5 per cent a year earlier, according to IDC, a Framingham, Mass.-based research firm.
The new company will be the No. 3 player in the U.S. personal computer market, with a 7-per-cent share of overall U.S. computer sales and a 25-per-cent share of U.S. retail desktop sales. It will also be the eighth-largest PC company in the world, with a combined revenue of $4.5-billion (U.S.)
"They [eMachines] are bringing to Gateway a strong brand that has grown dramatically in value over the past two years relative to its retail competitors and one of the most capable management teams in the PC world," said Mr. Waitt in a statement.
Gateway, known for it's black-and-white cow-spotted boxes, made its name in direct sales and with its Gateway "Country Store" retail outlets. It was also one of the first computer companies to start selling consumer electronics gear such as widescreen televisions and DVD players, a move that many of its competitors have since imitated.
Gateway has struggled in recent years, facing increasing competition from traditional PC vendors such as Dell and HP and from consumer electronics retailers including Best Buy Co. Inc. and Circuit City Stores Inc. Late Thursday it posted a loss of $111.3-million (U.S.) or 35 cents a share for the usually lucrative holiday retail season, compared with $69.2-million or 22 cents a share for the same period a year earlier. The latest period, which marked Gateway's 12th loss in 13 quarters, included charges of $41-million for restructuring and a tax provision of $24-million. Excluding those charges, Gateway posted a loss of 15 cents a share and ended the quarter with $1.09-billion in cash.
Revenue declined 17 per cent to $875.1-million from $1.06-billion despite a raft of new flat-panel televisions, cameras, music players and other gadgets that the company hoped would validate its gamble to become a consumer electronics company. The company sold 526,000 PCs during the quarter, down 27 per cent from last year. PCs accounted for 69 per cent of Gateway's sales, down from 82 per cent a year earlier.
"They're in an incredibly tough situation," said Barry Jaruzelski, lead partner in Booz Allen Hamilton's global technology and electronics practice. "They were starting from ground zero in consumer electronics but it's not happening fast enough. That area is now in the gunsights of all their major competitors."
Earlier this month, Gateway's Mr. Waitt attributed the company's poor end-of-year sales to supply constraints on two of its Media Center PCs and various high-definition TVs, as well as shrinking profit margins for low-end PCs. He also said more PC promotions by rivals affected Gateway's ability to "drive demand" in notebooks and low-priced desktop segments.
eMachines specializes mainly in selling low-priced computers through big-box retailers and electronics stores. It recently started testing the waters of the high-end PC market, becoming one of the first computer makers to build machines using the cutting-edge 64-bit processor from chip maker Advanced Micro Devices Ltd. These high-powered desktop are aimed mainly at hard-core gamers, and at people who need lots of computing power to edit things photos and video.
Besides boosting its U.S. retail sales, Gateway says eMachines' retail presence will help it expand in key international markets, including Japan, the U.K. and western Europe.
The combined company plans to sell Gateway-branded consumer and business desktops and notebooks, as well as servers and storage products for the professional market, through Gateway's existing direct channels. It will sell desktops and notebooks under the eMachines brand only through third-party retail channels in the U.S. and abroad.
Gateway added that by drawing on eMachines' "highly efficient and profitable operating model," which generated approximately $1.1-billion in revenue in 2003, it expects to realize "substantial cost savings" and return to "sustained profitability" in 2005.
"Gateway has the capital, the scale, the product line and the management expertise to help us dramatically increase our own growth," said Mr. Inouye in a statement.
Gateway will buy eMachines for 50-million shares of Gateway common stock and $30-million (U.S.) in cash. Under the terms of the merger agreement, eMachines' chairman and principal shareholder, John Hui, as well as Wayne Inouye and eMachines' management team, have entered stockholder agreements with Gateway that provide for certain holding periods, vesting periods and sale restrictions on Gateway stock. Under this agreement, these Gateway shares cannot be sold or hedged outside of the defined schedule over the next two years.
The agreement is still subject to customary closing conditions, and is expected to close within approximately six to eight weeks. The executive changes will become official when the deal closes.
eMachines has recorded nine consecutive profitable quarters, increased PC retail market share from 9 per cent in the first quarter of 2001 to approximately 25 per cent in the fourth quarter of 2003 and moved the company from the No. 6 spot in desktop and notebook PC sales in the United States to No. 4 in the fourth quarter of 2003.
With files from AP
