Gateway plans to acquire eMachines for about $US200 million to bolster its shrinking PC revenue while it pursues the consumer electronics market.
The deal would provide Gateway with the revenue generated by eMachines' strength among consumers in retail channels, the companies said. EMachines sells low-cost PCs that have made inroads with US consumers, who purchased enough PCs from the company to lift it into fourth place ahead of Gateway in the fourth quarter, according to market research from IDC.
Gateway chairman and chief executive officer (CEO), Ted Waitt, will give up the CEO title to eMachines CEO Wayne Inouye, but will remain as chairman and have an active role in Gateway's future. Inouye will also be named to Gateway's board of directors.
The deal is made up of 50 million shares of Gateway stock, and $US30 million in cash. Based on the closing price of Gateway's stock (on Thursday) of $US4.09, the total deal is worth $US234 million.
"This combination will create a company that has multiple brands, sells through multiple geographies and has a broad product line selling through multiple channels at the same time," Waitt said.
Gateway has aggressively shifted its business during the past year from PCs to consumer electronics, especially digital televisions. Many PC companies think the higher growth rates of the consumer electronics business will allow them to grow as the PC market matures.
But while Gateway has successfully introduced a number of plasma and liquid crystal display (LCD) televisions, its revenue from PCs remains its single largest segment, and that segment has dropped steadily over the past year. During the fourth quarter overall revenue fell 17 per cent and PC shipments declined 27 per cent.
Revenue from products other than PCs grew 39 per cent compared to last year's fourth quarter, Gateway said in its earnings report. The decision to acquire eMachines might show that Gateway de-emphasised PCs a little too quickly, before the consumer electronics market really got off the ground, director of industry analysis for NPD Techworld, Stephen Baker, said.
PCs with the eMachines brand would be sold only through third-party retail channels in the US. and in other countries, the companies said. Gateway has not sold products outside the US for several quarters.
The company also hopes to build on eMachines' channel strength by introducing more of its digital televisions and consumer electronics products into third-party retail stores, it said.
Gateway currently operates about 190 retail stores in the US, and sells products through its website.
"We want to combine our balance sheet strengths with eMachines' low-cost model to become a leader in consumer retail," Waitt said. As a result of the acquisition, Gateway would "look very closely" at its retail stores, he said.
Waitt declined to say if any stores would be closed as a result of a renewed focus on outside consumer retail channels.
Gateway has considered its retail stores an important part of its strategy to become what it calls a branded integrator, or a company that sells a wide variety of electronics products. This year it closed some stores, and redesigned the remaining stores to emphasise its consumer electronics products.
"In the future, retail is going to play a role in how technology products are bought for a long, long time," Waitt said.
Gateway went back and forth last year on the need for low-price desktops. For a time, it wanted to focus on higher-priced products since it didn't believe it could compete with Dell's cost strengths or HP's retail presence. But it unveiled a $US399 desktop in July, and the latest announcement underscored how important low-cost products were to PC vendors, Baker said.
"EMachines is a very focused and very successful company by doing one thing and doing it well, selling low-price desktop computers through retail," he said.
After the acquisition was completed, Gateway expected to post a profit in 2005, it said.
The deal is subject to regulatory approval, and is expected to close in six to eight weeks.