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Gateway to buy eMachines

Embracing retail channel to return to profitability

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Gateway has said it will buy low-cost PC maker eMachines in a bid to boost its market share around the world and in the US market in particular.

The deal, announced today, will see Gateway pay $30 million in cash plus 50 million Gateway shares to eMachines' owners, valuing the transaction at $235m.

If the deal proceeds as planned, Gateway will become the US' third largest PC maker - with a seven per cent share of the market - and the eighth largest in the world. The combined operation will have revenues of $4.5 billion and drive Gateway's return to profitability, which it expects to happen in 2005.

Essentially, Gateway is buying eMachines' retail presence and the low-cost distribution mechanism that backs it up, extending Gateway's reach beyond its own direct sales channel. Gateway-branded machines will continue to be sold direct, and the eMachines brand will survive to be sold exclusively through third-party retailers. Gateway's consumer electronics products will be sold through both channels.

Unlike Gateway, eMachines' fourth quarter was profitable - though as a privately held company eMachines has chosen not to reveal by how much. Gateway lost $114 million (35 cents a share) during the three months to 31 December 2003, in line with its own forecast.

The loss was almost double the one the PC maker reported this time last year when it was in the red to the tune of $72 million (22 cents a share). Excluding one-off items, however, Gateway's Q4 2003 loss drops to $49 million (15 cents a share) - pretty much what Wall Street had expected, according to Thomson First Call's average figure.

Revenue for the quarter dropped 17 per cent on the year-ago period, reaching $875 million from Q4 2002's $1.06 billion.

The company's attempt to broaden its coverage into consumer electronics appeared to pay off. But while sales of plasma TVs, DVD recorders, MP3 players, etc. were reported to be strong, PC sales were not. It also admitted that it was not able to meet demand for some of its most popular PCs, in particular its Media Center lines.

Gateway hopes that the cost savings it expects to make by merging with eMachines' operation, plus increase sales volumes - with eMachines' PC sales covering its own decline in that arena, along with its successful push into consumer electronics - and the benefits of eMachines' better margins will drive it back to sustained profitability sometime in 2005.

First comes the restructure. Gateway didn't say what that would cost, in addition to what its paying to eMachines' owners. But eMachines CEO Wayne Inouye will become Gateway CEO. Gateway founder Ted Waitt will retain his role as Chairman. ®

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