Saturday, January 31, 2004

Gateway to buy computer maker

eMachines deal still leaves it with low market share

The Associated Press

SAN DIEGO - 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," Roger Kay, an analyst at the research firm IDC, said. "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.

"Competing against Dell and HP is tough," Stephen Baker, an analyst for NPD Group Inc., said. "There isn't anything they can do to close that gap that would be meaningful. That gap is so big that there's just nothing you can do."

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 by 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.

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