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Gateway says it's not for sale

Despite rumors, the PC maker says it's not interested in being turned into a private company. Two of its rivals, though, have found that's not such a bad way to go.

PC maker Gateway says it's not interested in being turned into a private company, but two of its rivals have found that's not such a bad way to go.

For some time, analysts have suggested that Gateway might be prime takeover material. The latest speculation that the company might be on the block came up this week when BusinessWeek reported rumors that a leveraged buyout firm might be interested in purchasing Gateway for $5 a share. However, Gateway Chief Executive Ted Waitt owns 31 percent of the company, and a spokesman said that the CEO has no interest in selling.

"Ted Waitt has said publicly a number of times, including our most recent earnings call, that the company is not for sale," said Gateway spokesman Brad Williams. "We feel like our current capital structure is the right one." Williams would not say whether anyone has approached the company with an offer.

However, two of Gateway's rivals have gone private in the past two years, and both say they are benefiting from being away from Wall Street's glare.

Both MicronPC and Emachines were taken private last year, and both say the move has improved the bottom line. Such buyouts have become more prevalent as the once-soaring valuations of technology companies have crashed back to earth.

Brian Blair, an analyst at hedge fund Bluewater Capital, said that some of his colleagues in the hedge fund industry have been buying Gateway shares on rumors the company is being courted. Such an offer might make sense, given the company's well-known name and large customer base, Blair said.

"It feels like recently they have been on the cusp of turning things around, at least in terms of product design and marketing," Blair said. "I wonder if this hasn't raised some eyebrows in the investment community."

Gateway's stock edged up this week, but even with the gains, the company is trading around $3 a share, well below the rumored $5-per-share offer. Its current valuation is also roughly equal to the approximately $1 billion in cash the company has on hand.

MicronPC, Emachines bounce back
It's been about a year and a half since Idaho-based MicronPC--a direct selling rival of Gateway--was snapped up by Gores Technology Group.

Although MicronPC has been noticeably less visible since the buyout, it has also stopped losing money. According to the company, it has posted an operating profit for the past three quarters, although MicronPC has not said how much money it has earned.

MicronPC has turned things around by scaling back its efforts, all but abandoning the consumer market, while focusing on sales to government agencies, schools and small businesses. As a result, the company has roughly half as many workers as it did 18 months ago.

"It's a different approach than trying to keep up with a Dell (Computer) or an IBM," said Ross Ely, vice president of marketing and public relations for MicronPC.

Budget PC specialist Emachines tells a similar story. In November, the Irvine, Calif.-based company agreed to be acquired by one of its directors for $161 million. The company has stuck to its low-price roots, but has tweaked its business model to ensure that it doesn't get stuck with a lot of inventory. In exchange for offering stores PCs at the prices they want, Emachines now insists they keep whatever machines they order.

The arrangement may make stores more conservative when ordering, but it allows Emachines to be profitable, the company says.

Hunting for tech deals
As for the buyout firms, many are taking a closer look at the technology sector as valuations have dropped from their once-stellar heights.

Although he did not comment specifically on Gateway, a partner at leading buyout firm Texas Pacific Group said there are more high-quality technology opportunities today than there have been in the last few years.

"If you get out of the quarter-to-quarter growth restrictions that Wall Street puts on you, the mid- to long-term fundamentals are still quite interesting," said Justin Chang, a partner at Texas Pacific Group and co-head of its technology practice. "We're quite bullish about technology."

In particular, Texas Pacific Group has specialized in acquiring individual units that large companies want to shed as they seek to streamline their business. One example was the creation of On Semiconductor, a company Texas Pacific carved out of a chip unit Motorola wanted to unload.

Not all of the signs point to a sale being best for Gateway, though. The company has already done a great deal of restructuring and has little debt. Buyout firms are often looking for companies that can be made profitable with some re-jiggering of the balance sheet or other structural changes.

Also, Gateway focuses on the consumer market and could be hurt by the drop in public prominence that comes with being a privately held company.

MicronPC's Ely says that media interest in his company has decreased substantially since the company went private.

"You have to work a lot harder to maintain visibility," Ely said. "You are no longer attractive to (financial reporters and other) people who cover the stock market."