Gateway, the third largest PC manufacturer in the United States, has been toiling in oblivion for last couple of years as it stock price has come dangerously close to that $1 mark. However, the company has suddenly ignited the interest of Wall Street as it has seemingly been put into play by 2 different groups - a privately managed fund and its second largest shareholder. The latter, especially, has made his takeover tendencies clear by offering to buy the company’s retail business for $450 million. The news of the offer, which was made on August 3 but went public only yesterday, sent the stock up 13% on Wednesday. Now it remains to be seen if a bigger offer will be put on the table or if another computer manufacturer will step into the picture and make a bid.
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Gateway, founded in 1985, was one of the pioneers of the direct sales model (though it is clear that rival Dell perfected it) and it expanded operations to include selling through retail stores and catering to small and medium businesses. However, like many others, it suffered after the boom years of the late 90’s (during which its stock price hovered around the $70 mark) and a number of initiatives like selling consumer electronic products (i.e. flat panel TV’s, cameras, routers etc) were discontinued. The most publicized one was, of course, the closure of the Gateway branded retail outlets which were shut down in April 2004. The computer manufacturer has been without a permanent CEO for 6 months now as Chairman Richard Snyder has been serving on an interim basis since the resignation of Wayne Inouye. The recent maturation of the PC market (which has even affected industry leader Dell) also hit Gateway hard and traders seemed to have given up on it sending the share price to a 52 week low a couple of weeks ago (it was also removed from the S&P 500 index).
However, some investors still see significant value in the company as it still holds the No. 3 position in the PC market and outgrew it last year (PC shipments at Gateway rose 15% last year as opposed to 9% industry wide). It also has a significant brand presence and an especially strong business selling through major retailers like Best Buy (BBY: Charts, News, Offers). One of these investors is the firm Harbert Management Corp. which recently acquired a 10.2% stake in the company (the news of which sent shares up from their close price of $1.45 on Friday to $1.72 on Tuesday). Harbert sent a letter to management expressing interest in working with the company to build new and unlock existing value opportunities. A more direct approach was taken by the Chinese born businessman John Hui who offered to buy the retail business of Gateway for $450. He also hinted that he may be interested in buying out the rest of the company too (which includes the professional and direct segments too). Management has not responded to the offer yet though they said that it will be taken into consideration. This sent shares to an intraday high of $2.05 Wednesday before they closed at $1.95.
John Hui owns close to a 5% stake in the company which he acquired when Gateway bought out eMachines, a low cost PC maker that he founded, in early 2004. eMachines has since then gone on to become the driver of the retail side of the business (which is the crown jewel of Gateway). He believes that the retail segment is "subsidizing" the other parts of the company and deserves to be separated. It remains to be seen what the board thinks but the offer made by Mr. Hui seems to be a decent one. The bid amounts to $1.21 per share which is 83% of the stock price as of last Friday, $1.45 (i.e. before the recent run up) for what is around 64% of the entire Gateway business according to second quarter revenues (the retail segment generated $592 million in revenue, company wide sales were $919 million). Though Mr. Hui is known to have strong ties with a number of low cost Asian PC component manufacturers, doubts will exist over his suitability to lead the company effectively and ease the debt burden especially since Hewlett Packard (HPQ: Charts, News, Offers) and Dell (DELL: Charts, News, Offers) have a greater ability to withstand pricing pressures and exert leverage with suppliers. Therefore, it might make more sense for another PC manufacturer (perhaps a Lenovo or an Acer) to acquire and integrate Gateway into their operations and leverage the relationships that Gateway has built up with electronic retailers which is why it is a possibility that all Mr. Hui is trying to do is ignite interest in the stock and encourage a possible suitor to jump in and buy the company out at a premium and in the process provide him with a sizeable return on his stock holdings.
Gateway was incorporated as Gateway 2000 Inc. in 1986 and the Company changed its name to Gateway, Inc. in 1999. The Company directly and indirectly sells desktop and notebook computers and servers, PC-related products and services that are enabled by or connect with PCs to third-party retailers, consumers, businesses, government agencies and educational institutions. The Company's value-based eMachines' brand is sold exclusively through third-party retailers, while its premium Gateway brand is sold through its direct sales force, over the phone and web, as well as through third-party retailers and value added resellers. The Company completed its acquisition of eMachines on March 11, 2004. During the second quarter of 2004 and in connection with the acquisition of eMachines, Gateway created two new segments, Retail and International, and realigned its historical operating segments, Direct and Professional. The Company markets its Gateway-branded products and services directly to customers, primarily by placing advertisements through traditional and electronic media and promotion on the its website. The Company's Professional sales and marketing activities focus on its core market segments: medium-to-large business, education and government. The Company sells its Gateway and eMachines-branded products directly to a select group of major retailers, such as consumer electronics stores, computer superstores and warehouse clubs, in addition to selling select Gateway-branded products through television shopping retailers. As of December 31, 2004, the Company had approximately 1,900 employees.
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