Greener pastures for Gateway?

Times Staff Writer

Gateway’s cows are going global.

Gateway Inc., the struggling Irvine-based personal computer maker, agreed Monday to be acquired by Taiwan’s Acer Inc. for $710 million in cash. The company is best known for its commercials with chattering cows and its Holstein-print shipping boxes.

By snapping up Gateway, Acer would displace Apple Inc. as the U.S.’ third-largest computer seller with nearly 11% of the market, according to research firm IDC.

After operating at close to break-even for several years, Gateway would get access to lower prices for its components, boosting its bottom line almost immediately, said independent analyst Roger Kay.


“Gateway won’t have to live hand-to-mouth anymore,” he said.

Acer’s bid of $1.90 a share represents a 57% premium over Friday’s closing price. The deal is expected to close in December.

Teaming with Gateway would make Acer a serious player in the U.S. market. The Taiwanese company shipped 5.2% of all PCs sold in the U.S. in the second quarter, good for fifth place just behind Gateway with 5.6%, according to IDC. They trail Dell Inc., Hewlett-Packard Co. and Apple.

“Acer gets three big things out of this,” Forrester Research analyst J.P. Gownder said. “They get the website, where they sell computers directly to customers. They also get shelf space in retail stores like Best Buy and Circuit City, which is not easy to get. And they also get a brand name that’s well recognized in the U.S.”

Gateway earned its reputation decades ago as a homegrown company. Ted Waitt, then 22, and his brother Norm founded the business in an Iowa farmhouse in 1985.

They sold accessories for Texas Instruments computers and later added their own line of computers.

Gateway decamped to Southern California in 1998 but kept true to its Midwestern roots by continuing to package its computers in boxes with the black-and-white print of a Holstein cow.

Cutthroat competition from Dell, Hewlett-Packard and others soon whittled away at Gateway’s profit margins and cash reserves. The company, which had more than $1.3 billion in cash and short-term investments in 1999, ended last year with $416.3 million. Its shares have followed a steeper descent, tumbling 98% from a high of $82.38 on Nov. 16, 1999.

Gateway shares gained 61 cents to $1.82 on Monday after the companies announced the planned acquisition.

Reflecting the declining fortunes of Gateway and the broader PC business, Acer’s bid was roughly one-tenth of the $7 billion offer from Compaq Computer Corp. that Ted Waitt turned down in 1997. Compaq has since been acquired by HP.

“The PC business in the U.S. is hypercompetitive,” IDC analyst Richard Shim said. “It’s difficult for anybody to grow organically and squeeze out any major competition.”

In addition to boosting Acer’s U.S. position, the deal would strengthen the company’s presence in Europe, where it already gets more than half its revenue.

Gateway holds the option to buy Packard Bell, a PC vendor based in the Netherlands, from Lap Shun Hui, who also founded budget PC maker EMachines Inc. and sold it to Gateway in 2004.

Gateway said Monday it would exercise that right, which would keep Packard Bell out of the hands of Acer’s Chinese rival, Lenovo Group. Lenovo has been in talks to purchase Packard Bell.

Acer President Gianfranco Lanci said there were no plans to lay off any of Gateway’s 1,645 employees.

Combining the two companies’ purchasing power alone would yield $150 million in annual savings, he said.

Acer plans to retain the Gateway brand and export the distinctive cow-print logo to Europe and Asia, where Acer has an established distribution network, Lanci said in an interview.

“Gateway has strong brand value,” he said.