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Why Gateway and eMachines Are Marrying

On Jan. 30, PC maker Gateway (GTW) announced plans to buy rival eMachines for $235 million in cash and stock. Gateway CEO and founder Ted Waitt believes combining the two companies will give Gateway a leg up in the cutthroat PC market against kingpins Dell (DELL) and Hewlett-Packard (HPQ), which have been grabbing share from Gateway and making it difficult for the San Diego-based company to return to profitability after two years of losses. Waitt says the combined Gateway-eMachines could turn a profit as soon as 2005.

Waitt will serve as the new outfit's chairman, but he plans to hand the CEO spot to eMachines's CEO Wayne Inouye, who has turned his privately held company, based in Irvine, Calif., into a profitable leader in the low-price PC market. Shortly after announcing the merger, Waitt and Inouye talked about the deal with BusinessWeek Los Angeles Correspondent Arlene Weintraub. Following are edited excerpts from their conversation:

Q: Why does this deal make sense for Gateway?

Waitt: eMachines has developed a true low-cost model that allows it to remain profitable while selling PCs at low price points. Gateway has never been good at that. We believe we can take Gateway's brand and eMachines' very efficient distribution model and create a win-win for everybody. It's about rationalizing costs and combining strengths so we can pursue aggressive growth.

Q: eMachines has developed strong partnerships with large consumer electronics retailers such as Best Buy (BBY) and Costco (COST). In light of the high costs involved in maintaining Gateway's stand-alone stores, wouldn't it make sense to close the stores and distribute Gateway products through eMachines' retailers?

Waitt: Our goal is to reduce our sales, general, and administrative costs. eMachines has the most competitive cost structure we've ever seen. We'll look closely at our stores and decide what needs to be done to get to profitability. If the stores fit, fine. But we'll do whatever is needed to cut costs and become profitable.

Q: Over the last year, Gateway has introduced several consumer-electronics products, leading some analysts to wonder if Gateway was planning to move out of the PC market altogether. Does this deal solidify Gateway's commitment to PCs?

Waitt: Yes. It was never an option to exit the PC business. It's a huge business. It's a tough business. But we see opportunity for another really strong player.

Q: What will be the brand and distribution strategy going forward?

Inouye: We've talked about a lot of things. Ted is a believer in having multiple brands distributed through multiple channels. But we're not ready yet to roll out our full strategy.

Q: How will the new company be able to better compete against HP and Dell?

Inouye: We'll have double the volume [compared to Gateway and eMachines separately], more scale, and a better ability to leverage our buying strength.

Waitt: And we'll be able to take eMachines' experience on the low-end of the market and use that to compete directly with Dell.

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