Gateway To Acquire eMachines

A declining Gateway Inc. will acquire an ascending eMachines Inc. for about $235 million, in a deal that will keep the Gateway brand and bring in eMachines' Wayne Inouye as the new chief executive officer of the merged company.

The news came Friday--a day after Gateway reported a sharp loss of $114 million. eMachines is a privately held company, but it reported that its last nine quarters have been profitable.

"The combined company," the firms said in a statement, "plans to leverage eMachines' established retail relationships and low cost distribution model in the U.S. and abroad to expand distribution of Gateway's successful and growing line of consumer electronics products beyond its existing direct channels." The companies reported Gateway will continue to sell its servers, storage products, and business desktops and laptops through the existing Gateway direct channels.

The new combination involved a shuffling of top executives and officers. While Inouye will direct the new company, Ted Waitt, Gateway's founder, will move up to chairman of the board, and Roderick Sherwood III will continue as Gateway's chief financial officer. The firms' joint press release noted that eMachines chief stockholder, John Hui, and other executives have agreed to a stock holding period that commits them "to an equity-based, long-term relationship with Gateway, focused on the company's future success."

The deal involves the current Gateway entity paying $30 million in cash and 50 million Gateway shares for eMachines. Gateway's stock closed at $4.09 Thursday.The combined entity will be the third largest PC company in the U.S., representing $4.5 billion in sales in 2003. The companies said they will take advantage of eMachines' low-cost business model, which generated $1.1 billion in sales last year. That figure represented a 40 percent jump in revenue over the previous year.

In recent months, Gateway has moved into some consumer markets. It is the leading seller of plasma TVs in the U.S., and has recently introduced a wide range of consumer products, including digital cameras, MP3 players, home-theater systems, and DVD players and recorders.

"The transaction is expected to take Gateway's branded integrator strategy and accelerate it from both a scale and efficiency standpoint, creating a company with a low cost structure. . .and maximum flexibility in its business model," the release stated.