Can Gateway Round Up The Suits?

Ted Waitt's mission: Crack the corporate market, big time

Theodore W. Waitt, CEO of Gateway 2000 Inc., knows no obstacles. In high school, he longed to buy a bright yellow 1974 Jeep Cherokee, so he took a job washing dishes in a South Dakota hospital basement. His mother, Joan Waitt, still groans over how he would come home covered in grease. "It was disgusting," she says. But Waitt came up with half the cash, per the agreement with his parents, and bought the vehicle. "When he sets his mind to something," says his mother, "nothing gets in his way."

That's about to be put to the test. Waitt, 34, is readying an all-out assault to push Gateway--known as the "cow company," after its holstein mascot--far beyond its 8% stronghold in the $18 billion U.S. home computer market. The new destination: Corporate America, which spends $38 billion a year on PCs. Known for low-priced, feature-rich models that home buyers love, Gateway has much to do to prove it has the sales and service bona fides to support big companies. "It's going to take some time for them to build up credibility," says analyst Christine Chien, of Zurich Kemper Investments Inc., one of Gateway's largest shareholders.

SILICON COWBOY. Ironically, this time around, Waitt may not help his own cause. The son of a fourth-generation cattle broker, Waitt has long had an image as the industry's silicon cowboy, disdaining the suits and ties befitting the corporate world. Instead, the lanky, ponytailed Waitt welcomes corporate visitors to the company's North Sioux City (S.D.) headquarters as is his custom: in a denim jacket and snakeskin boots--no doubt smoking one of his trademark Camels. Clothes don't close a sale, Waitt says, products and services do. "I firmly believe that the company with the most satisfied customers will win in the long run," he says.

We shall soon see. On May 21, Gateway will announce new products, beefed-up service, and an expanded sales force all aimed at big business. Today, Gateway holds just a 6% share of the corporate market, after a four-year drive that has done little more than move its machines into small and midsize companies. "We're going to be much more aggressive than we have in the past," vows Waitt.

And more focused. In March and early April, Gateway's senior execs were distracted when Waitt raised the idea of selling Gateway to Compaq Computer Corp. for some $7 billion. The talks, however, collapsed in mid-April. Compaq won't comment, but Gateway insiders say Waitt worried that his employees would be hurt in a sale and that ties to his native Sioux City would be curtailed. Waitt won't discuss the talks but pledges he will keep running Gateway. "I talk to a lot of companies in the industry, and there are a lot of people who would love to have our business model," he says. "But the company's not for sale."

Instead, Waitt is refashioning Gateway for corporate PC buyers. That means a slew of new products, including the industry's first NetPC, a design for slimmed-down, cheaper computers aimed at big companies. Waitt also will ship new notebook PCs that are easy for companies to maintain because all the components are interchangeable. And a line of PC servers will follow later this year.

Corporations also can expect more care and feeding from Gateway than in the past. The sales and service staff dedicated to major accounts will double, to 240 people. And Gateway's sales force in the field--historically weak--will more than double, to 40. While that's an improvement, it's still a far cry from the 200 salespeople Dell Computer Corp. has knocking on corporate doors. "Gateway has to have feet on the street," says James P. McDonnell, Hewlett-Packard Co.'s worldwide marketing manager for PCs. "After all, Dell doesn't sell over the telephone to Procter & Gamble."

Still, Waitt is confident Gateway can make headway. "The goal is to get our major accounts to where the rest of our business is," he says. Waitt points out that Gateway's share of the home market rose to 10% in the fourth quarter. If the company can reach that level in the corporate segment, it will add close to $1.6 billion a year in additional revenues.

That could prove as tough as it sounds. Compaq, IBM, and Dell have been cultivating the corporate market for years and have built loyal followings. Gateway can undercut larger vendors on price--on average 10% to 15%--which has helped it in the consumer and small-business markets. But it could take years to convince large companies that Gateway can be counted on for all their needs. "The initial success is coming in the small and medium businesses," says Vadim Zlotnikov, senior technology analyst at Sanford C. Bernstein & Co. "Beyond that, they're going to have an account-by-account fight."

One big question: Is Gateway, the consumer's "friend in the business," in sync with Gateway, the corporate supplier? Waitt has always played up his Midwestern roots and marketed his folksy charm. The first Gateway ad asked "Computers from Iowa?" in mock disbelief and started the tradition of using the holstein cow as the symbol for the company, which was then located in Iowa. But some critics say that won't fly in Corporate America. "They'll have to lose the cow motif," says Hewlett-Packard's McDonnell.

Lose the cow? Ever since Waitt started selling personal computers with his friend, Mike Hammond, in 1987, his wry cowboy charm has worked wonders. After averaging growth of 44% in the past three years, Gateway has become the nation's sixth-largest PC maker, with sales of $5 billion in 1996, and net income of $251 million. Its stock has doubled since last July, to $62 a share, making Waitt's 46% stake worth $2.2 billion. Last year, he took home $81.3 million in total pay, largely by exercising stock options.

But as consumers warmed to Waitt's ads and bought his products, one group gave it a chilly response: Corporate America, especially the country's largest companies. They have been leery of a company whose headquarters is painted in the whimsical black-and-white pattern of a cowhide, where the mostly under-30 crowd wears jeans and T-shirts, and the CEO leads a pep rally each year featuring rock bands and execs dressed as holsteins. At last year's pep rally, Waitt led the crowd in dancing the macarena.

As for Waitt, he comes across more as a high school prankster than as the hard-charging chief of a $5 billion corporation. In his office with his boots propped up on the desk, the rock group Gin Blossoms blares as Waitt chain-smokes and gabs on his cell phone. The father of four is most often behind the wheel of his silver Chevrolet Suburban, although he prefers fast cars and owns a Porsche that can reach 160 mph. And if there's a good blues or zydeco band playing in Sioux City, he's likely to show up. One can't help but wonder: Can this man sell big business?

Don't bet against him. In 12 years at the helm, Waitt has proven remarkably adept at building a multibillion-dollar company from scratch. His strength is anticipating technology changes: Gateway adopted Intel Corp.'s Pentium processor, the color monitor, and standard CD-ROM drive before other PC makers did--and reaped huge market share gains.

EARLY START. Waitt can be innovative, too. One day when he was huddled around a PC with his wife and kids, he thought it would be much easier for families to use computers together if they were looking at a screen the size of a large TV. The result was the $4,399 Destination, a combination television and personal computer that Gateway introduced last year. The company has sold close to 10,000 units, and such competitors as Toshiba Corp. and Compaq are following Gateway into the market.

Waitt honed his creative skills at an early age. As a teenager, he delivered the Sioux City Journal by foot, pulling a stack of papers in his red wagon. But going door to door to collect payment proved time consuming since many people weren't home or they didn't have the money. So, Waitt devised a solution: He stuffed self-addressed envelopes in his papers, cutting the time it took for collections substantially.

Although he's a two-time college dropout--the University of Colorado and the University of Iowa--Waitt sometimes has the touch of an MBA. In 1992, Gateway was having problems with the quality of its machines. He decided to revamp the manufacturing process so that machines were put together with teams of people, each responsible for overall quality. Defects plummeted, although Waitt is not sure exactly how much. "We didn't use a whole lot

of quantitative measures," he says. Waitt now uses teams for everything from product development to strategic planning.

Waitt also isn't afraid to hire people with the skills he lacks. In 1991, he recruited Richard D. Snyder away from Coopers & Lybrand to bring more strategic planning and professional management to Gateway. Snyder now is president and chief operating officer. Two years later, Waitt tapped William G. Shea, a former IBM executive, who is now Gateway's vice-president for major accounts in charge of selling to the business, government, and education markets.

The major accounts business has come a long way since then. Shea, in particular, has done a makeover on Gateway's service--the wait for a call to a technician is under two minutes most of the time vs. 10 minutes two years ago. That has helped boost major accounts sales to $1.5 billion. Take Mitsubishi Motor Sales of America Inc. The company bought 240 Gateway laptops for its sales force last year--with some trepidation. Then a salesman cracked the screen on his laptop, and Gateway fixed the problem in less than a day. "We're so happy, we've committed to switching all [the company's 1,500 desktops] to Gateways," says Gregory Stahl, who manages computer systems for Mitsubishi's dealers and salesmen.

Even if Waitt doesn't don a suit and tie, with testimonials like that, the cow company may mosey its way into Corporate America.

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