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Gateway investor group wants foot in the door

The investors are calling for a say in operations, arguing the PC maker should take a page from retailer Target.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
4 min read
Gateway has received notice from an investment group with a 10 percent stake that it wants a seat at the table to discuss the company's business operations and CEO search.

Firebrand Partners and Harbinger Capital Partners sent a formal letter to Gateway's interim chief executive, Richard Snyder, on Monday, according to a filing with the Securities and Exchange Commission. The investor group, which began discussions with Gateway over the weekend, is calling for the PC maker's management to give it a voice to air its ideas and proposals on running the company, David Hallisey, a Gateway spokesman said Tuesday.

"We are definitely in agreement with meeting with them and hearing their thoughts. We are eager to work with them," Hallisey said. "They seem to be amicable and supportive. They have not made any demands at this point. It seems above board and positive."

Gateway has been sputtering along for several years, outpaced by PC market giants Dell and Hewlett-Packard and others such as Taiwan's Acer. It merged with low-cost specialist eMachines two years ago and subsequently straightened out its financial operations. But in January CEO Wayne Inouye departed.

Scott Galloway
Scott Galloway,
Firebrand Partners

In the letter to Snyder, a Firebrand principal holds out hope the company can reignite its operations and stock.

"The motivation for our investment in Gateway can be distilled to one simple thesis; there is nothing wrong with Gateway that can't be fixed with what's right with Gateway," Scott Galloway, managing member of Firebrand, stated in the letter. "We believe that the firm's brand equity, heritage of innovation and retail channel strength position the firm to be a leader in the evolution toward design-driven, user-friendly, media-facile PCs."

The letter goes on to say that the investment group, comprising founders, CEOs and strategic investors in consumer brands, would draw on its collective experience to recruit top-notch leadership and to take steps to boost the company's margins.

Galloway, a professor of marketing at New York University's Leonard N. Stern School of Business, is no stranger to shareholder activism. He has tussled with such retail companies as Sharper Image and Red Envelope (a company he helped found), as well as Harvey's Electronics. He owns 200,000 shares of Gateway.

"My model is to invest with a capital source, but this is the first time I've worked with Harbinger Capital," Galloway said in a phone interview on Tuesday.

He noted Gateway's channel strategy is good but said the company needs to reposition itself in the market. Drawing an analogy to major retailers, Galloway described Apple Computer as the high-end couturier Saks Fifth Avenue, Dell as the value chain Wal-Mart Stores and Gateway as a Kmart.

"Kmart is basically a Wal-Mart, but less," he said. "Gateway should be like a Target."

Although Gateway is searching for a new chief executive, Galloway said he has no interest in the role. He said the company should find a CEO who has a strong consumer background, rather than one with extensive experience in the technology arena.

Firebrand, meanwhile, is poised to be compensated for its efforts in dealing with Gateway's management and board.

Harbinger Capital Partners plans to pay Firebrand a fee, based on the appreciation of its Gateway investment. Firebrand will receive 10 percent of Harbinger's net profits from sales of its Gateway stock, in exchange for providing such services as developing and presenting proposals to Gateway's management and board of directors, according to the SEC filing.

Harbinger, which owns 37.8 million shares, or a 10.2 percent stake, is run by executives of Harbert Management, an Alabama-based firm that specializes in such areas as investing in distressed companies. The company focuses on restructuring, liquidations and short sales of stock.

Representatives of Harbert Management declined to comment.

Harbinger began buying Gateway shares on June 21 at $1.60 a share. Over the subsequent weeks, it purchased shares as high as roughly $2.08 a share and as low as $1.31.

Galloway bought his 200,000 shares on Aug. 10 at $1.31 a share, according to the SEC filing.

"We hope our investment and background reflect the expertise and resolve we can bring to Gateway and its shareholders," Galloway stated in his letter. "We've spent a great deal of time researching the brand and are enthusiastic about our investment and the prospect of committing time and effort to help you in your endeavors."

Galloway declined to specify what actions the group might take if the company does not take its suggestions seriously.

One common technique used by shareholder activists is to gain influence over a company by putting forth its own slate of board candidates to run for board seats that have terms expiring. The shareholder activists then ask investors to vote for their nominees, rather than the ones that the company has put on the ballot.

Talks with Gateway are still in the very early stages, Galloway said. "We're in the bottom of the first inning."