Waitt: Gateway Remains Committed To Partner Strategy With eMachines Deal

Gateway Chief Executive Ted Waitt on Friday said the company remains committed to building a solution provider network in the wake of its $235 million cash-stock acquisition of eMachines, a fast-growing, retail-focused PC maker.

The deal will make Gateway the third-largest PC maker in the United States, with revenue of $4.5 billion. Gateway will exchange 50 million shares of Gateway common stock valued at approximately $205 million and $30 million in cash for all of eMachines' assets. Gateway shares were up 11 percent, or 44 cents, to $4.53 in trading Friday after the deal was announced.

The privately held eMachines, which has reselling agreements with retailers such as Best Buy and Circuit City, did $1 billion in annual revenue last year. Gateway said eMachines has been profitable for the past nine consecutive quarters. Gateway also proclaimed that the deal will enable it to return to "sustained profitability" for 2005.

Under the terms of the deal, Waitt, who will remain chairman of the combined company, will hand over the Gateway CEO role to eMachines CEO Wayne Inouye.

Inouye will also be named to Gateway's board of directors. Waitt, Gateway's founder, will continue to play an active role in the combined company's long-term strategic direction, product development, marketing plans and other areas.

Waitt said that Gateway's Professional Division, which is headed by Jocelyne Attal, will continue to build a solution provider network. He said the cost synergies along with eMachines' low-cost model for designing and developing systems and procuring parts will "enable us to be much more competitive at the low end of the PC market for small and midsize businesses."

Gateway does not currently anticipate using the eMachines brand for its Professional Division, Waitt said.

Even with eMachines' retail focus, Waitt said he believes there will be multiple channels for customers to provide home networks, including a segment of customers that "are willing to pay for a high level of service and want everything installed [by] a variety of resellers and a combination of local integrators."

"It is really going to depend on the customer," Waitt added. "It is not going to be one size or slice fits all there."

Attal, executive vice president, Gateway Professional, said the eMachines acquisition will provide new low-end product punch for Gateway solution providers competing against Dell. Noting that Gateway is mounting an effort to attract white-box builders, Attal said: "This is going to allow our VARs and solution providers to compete with Dell on the low end. It's a competitive advantage. If I were Dell this morning, I would worry."

Attal said that in addition to about 250 active partners, Gateway added 60 VARs focused on vertical industries in the fourth quarter and is on track to add 95 in the current quarter.

As part of its small-medium business push, Gateway also just promoted Steven McAllister from vice president of alternate channels to vice president and general manager for Small Medium Business (SMB), including channels. McAllister will report to Attal.

Waitt would not comment on whether the deal could result in Gateway eventually closing its 190 retail stores. "We're going to look closely at our retail operations and determine what will allow us to retain the right mix going forward and to really develop the right relationships with our retail channel partners," he said. "We want to minimize any conflict." Currently, Gateway has no plans to sell the eMachines products through its own retail stores, Waitt said.

Although Gateway would not comment on any layoffs that could result from the deal, the company said it expects substantial costing savings and synergies from the acquisition. Furthermore, Wait said the deal will be accretive to Gateway in the second half of the year.

Under the terms of the merger agreement, eMachines' chairman and principal shareholder, John Hui, as well as Inouye and eMachines' management team, have entered into stockholder agreements with Gateway that provide for certain holding periods, vesting periods and sale restrictions on Gateway stock. Under this agreement, these Gateway shares cannot be sold or hedged outside of the defined schedule over the next two years.

Waitt, Inouye and Gateway CFO Roderick Sherwood III will lead an integration team comprised of the two companies' senior executives that will focus on "rapid finalization and execution of combined cost-savings plans, channel and product expansion initiatives and other growth strategies." The deal is expected to close in the next four to eight weeks, Gateway officials said.