Gateway rejects bid for retail unit

Computer maker says it's not in shareholders' best interest to accept $450 million offer from former eMachines exec.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
2 min read
Gateway has rejected a buyout offer from the former owner of eMachines, who wanted to acquire the computer maker's retail operations for $450 million in cash.

Gateway, which has been struggling for years to increase its revenue growth and profitability, said Friday that its board of directors consulted with legal and financial advisers and determined it was not in the best interest of shareholders to accept the offer from Lap Shun "John" Hui.

"Gateway's board of directors and management team remain committed to taking the appropriate steps to enhance shareholder value," the company said in a statement.

Gateway's retail unit is composed largely of the low-end eMachines business and has helped stabilize the company by serving up consistent revenue growth.

Gateway's business, nonetheless, has struggled overall, and the company's stock price has steadily declined despite numerous restructurings. The company has a market capitalization of $725 million.

The offer by Hui would have, in essence, returned the former eMachines, which was sold to Gateway in 2004 for $262 million, back to its previous state as a small niche computer maker for the retail market. Gateway would have been left with its direct sales channel and enterprise business if the deal had moved forward.

Hui and his representatives were not immediately available for comment.

But in a previous letter to Gateway, Hui indicated he may consider buying the entire company if Gateway's board of directors rejected the idea of selling just the retail business to him. In his letter, Hui noted he would entertain the idea of buying the entire company and then later breaking it apart.

Based on the multiple that Hui applied to Gateway's retail business, the entire company could fetch roughly $882 million, one analyst speculated. But analysts note it's unlikely Hui would pay that price for the entire company, given his low assessment for Gateway's direct and enterprise business.

Hui would need to find buyers for the nonretail side of Gateway's business, as well as determine who should get the rights to Gateway's strong brand name, said Rochdale Research analyst Daan Coster.

"If you slice up the Gateway brand, it could get messy," he noted.

Coster reiterated that he suspects Hui wants to force to the table other potential buyers who may have been eyeing Gateway as a takeover target but were hoping to pick up the company for a cheap price in bankruptcy court.

A major investor group, which recently stepped forward to seek Gateway's ear on how it should increase its value, said it was pleased Gateway rejected Hui's offer.

"The company's response was a correct one, in my view," said Scott Galloway, a principal of Firebrand Partners. "It would have been like selling one leg of a three-legged stool."

Firebrand, a small investor in Gateway, was hired by Harbinger Capital Partners, which holds a 10.2 percent Gateway stake, to work with the computer maker on developing ways to increase shareholder value.

Galloway characterized the meetings with Gateway as productive and on-going.