Gateway makes $235m offer for eMachines

Gateway plans to acquire rival eMachines in a bid to regain its footing in the PC game and broaden the distribution of its Gateway-branded consumer electronics devices in retail outlets.

The Poway, California-based company plans to purchase privately held eMachines for $30m in cash and 50 million shares. Based on Gateway's closing price of $4.09 per share on Thursday, the total value of the deal would be approximately $234.5m.

The companies' combined PC businesses would constitute the third-largest PC manufacturer in the US, Gateway said, and rank it eighth in the world.

The deal is subject to regulatory approval and is expected to close in six to eight weeks.

By making a bid for eMachines, Gateway is hoping to combine the best of two worlds, creating a much larger PC business and giving itself additional sales channels for consumer electronics, such as its Gateway televisions, both inside and outside the US.

The move could allow Gateway to double its annual PC volume from about 2 million to about 4 million units and position itself as a "very strong number three" to Hewlett-Packard and Dell, Ted Waitt, Gateway's CEO, told silicon.com sister site CNET News.com in an interview Friday.

eMachines has been one of the fastest-growing PC companies in the US. Last quarter it posted a higher unit shipment growth rate than any of the other top manufacturers in that country. It grew unit shipments almost 21 per cent year over year to 498,000 units, which moved it back into the top five manufacturers, according to IDC.

eMachines also operates with a unique business model, designed to help keep its costs low. It only builds enough PCs to satisfy orders from retailers. It also aims to sell all of those PCs by the end of each quarter. Meanwhile, it does not accept returns or provide price protection to retailers against future price drops, two measures that could also cut into profits.

"If you look at some of the synergies of this combination, we're going to [be able to] build a model that has multiple brands, selling across multiple channels... in multiple geographies," Waitt said.

Under the agreement, Wayne Inouye, eMachines' CEO, would become CEO of Gateway, and Roderick Sherwood would remain as Gateway's chief financial officer. Waitt, Gateway's founder, would remain as chairman of the board.

Gateway's bid for eMachines also says something about the PC market. While unit sales reached a new high in 2003, the market was hostile to PC makers' revenue because of falling prices. PC makers shipped a record 152.6 million desktops, notebooks and servers last year but saw their collective revenue shrink by $51bn to $175bn, when compared to 2000, according to IDC.

Although the market appears to be improving, manufacturers will likely continue to consolidate, because it's difficult to turn a profit in the PC business, said Roger Kay, an analyst at IDC.

"Companies will either merge or have to get out of the business," Kay said. "The economics are kind of grinding away at the industry. Everybody's still hurting."

The market has been a particularly rough place for Gateway. During the fourth quarter, Gateway sold only 526,000 PCs, a 6 per cent sequential decrease and a 27 per cent decline from a year ago. Meanwhile, eMachines has been growing. The PC maker has expanded its model lines to include notebooks and also offers the latest processors from Advanced Micro Devices, whereas Gateway has sold only Intel-based PCs for the last several years.

Gateway said the merged PC businesses would generate several billion dollars in revenue annually. During 2003, their combined revenue totalled $4.5bn. Alone, eMachines generated about $1.1bn in revenue and kept selling, general and administrative expenses to "mid-single digits" as a percentage of that revenue, Gateway said. The low expenses helped eMachines profit while mainly selling low-price desktop PCs.

John G Spooner writes for CNET News.com.