Gateway to buy eMachines

A few years ago, eMachines was given up for dead. It was revived by Wayne Inouye. Now, the fairytale turnaround (a rarity in the Dell-dominated PC industry) has attracted an embattled Gateway, which is buying eMachines for USD 266 million in stock and cash. “The companies’ combined PC businesses would constitute the third-largest PC manufacturer in the United States, Gateway said, and rank it eighth in the world. By making a bid for eMachines, Gateway is hoping to combine the best of two worlds, creating a much larger PC business and giving itself additional sales channels for consumer electronics, such as its Gateway televisions, both inside and outside the United States. The move could allow Gateway to double its annual PC volume from about 2 million to about 4 million units and position itself as a very strong No. 3 to Hewlett-Packard and Dell, Ted Waitt, Gateway’s CEO said.”

The secret behind eMachines’ success: “eMachines has been one of the fastest-growing PC companies in the United States. Last quarter it posted a higher unit shipment growth rate than any of the other top manufacturers in the United States. It grew unit shipments almost 21 percent year over year to 498,000 units, which moved it back into the top five manufacturers in the U.S. market, according to IDC. eMachines also operates with a unique business model, designed to help keep its costs low. It only builds enough PCs to satisfy orders from retailers. It also aims to sell all of those PCs by the end of each quarter. Meanwhile, it does not accept returns or provide price protection to retailers against future price drops, two measures that could also cut into profits.”

Another report gives the background to the acquisition from eMachines’ viewpoint:

In late 2001, the company’s shareholders agreed to its acquisition by one of the company’s directors in a buyout that took eMachines private in a deal worth about $161 million.

Rather than fade into oblivion, like so many other PC makers of the previous 20 years, eMachines found itself at the start of a turnaround. The company was able to boost its share of the U.S. PC market from 2.1 percent in the first quarter of 2002 to 3.4 percent by the end of last year, rising from ninth to fourth in terms of market share, based on units sold. During the same period, Gateway’s share of the U.S. market dipped from nearly 6 percent to just below eMachines’, also at about 3.4 percent, for the last quarter of 2003, according to IDC.

Despite its success, eMachines faced challenges for the future, some of which led it into Gateway’s arms. One of the most pressing issues was where to get the money needed to continue the company’s expansion into notebook computers and overseas markets.

“Clearly, eMachines had been struggling with how to bring capital into the company,” IDC analyst Roger Kay said. “They had even talked about going public.”

Although the company was profitable, analysts doubt that eMachines was making much money, likely posting margins of just 2 percent or 3 percent. “They had to work really hard to make $20 million or $30 million (a year),” said Stephen Baker, an analyst at the NPD Group. “That’s hard work.”

More inputs from Fortune and WSJ.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.