by Anton Shilov
02/01/2004 | 05:49 AM
Gateway, a PC and digital electronics maker who lost $114 million last quarter, announced it had reached an agreement to acquire eMachines, a rapidly-growing US-based privately held PC company, for 50 million shares of Gateway common stock and $30 million in cash. The combination of two companies will establish a very strong No.3 computer company in the
Last year Gateway and eMachines shipped nearly equal numbers of PCs – about 2 million, or about 4 million personal computers in total. Combined market share of both firms in the PC business – roughly 7% – is not large enough to compare with major players – HP, Dell and IBM – but it looks like the intention of the deal is to solidify and improve current positions of Gateway and eMachines in the term of the next couple of years, but not to fiercely challenge bigger players straight away.
eMachines has been focusing on low-cost personal computers for consumers who acquire PCs via retail stores, such as BestBuy, during the recent years. Such strategy allowed the company to rapidly improve its positions and even become moderately profitable. Currently the firm needs to expand its businesses and requires additional funds that are pretty hard to find for a company that became privately-owned in 2001.
Gateway, on the other hand, used to be a pretty “loud” computer firm in the late nineties, but the trend towards low-cost PCs made the company to focus on Consumer Electronics markets loosing around 50% of its bygone market share.
Generally speaking, being located on pretty different sides of PC business, these two companies may pretty well help each other to grow. Moreover, in a long-term future we may see a yet another company capable of competing with Dell and HP in terms of broad product portfolio, low-cost solutions and some other options.
The combined company plans to leverage eMachines’ established retail relationships and low-cost distribution model in the US and abroad to expand distribution of Gateway’s successful and growing line of consumer electronics products beyond its existing direct channels. It is not clear, however, whether eMachines’ PCs will be available via Gateway’s online store.
Gateway will also adopt many elements of eMachines’ operating model, which last year generated approximately $1.1 billion in revenue, an increase of more than 40% over the prior year, and selling, general and administrative (SG&A) expenses in the mid-single digits as a percentage of revenue, coupled with world-class service and support and high-quality products.
Under the agreement, Wayne Inouye, eMachines’ chief executive officer, will be 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, continuing to play an active role in the company’s long-term strategic direction, product development, marketing plans and other areas.
As a result of sales volume increases, planned cost savings and other synergies associated with its acquisition of eMachines, Gateway said that it expects to return to sustained profitability for 2005.