August 23, 2006 2:59 PM PDT
Gateway buyout bid a call to others?
Lap Shun "John" Hui, former executive of eMachines, which Gateway purchased in 2004, has offered to buy Gateway's retail operations for $450 million in cash. Gateway's retail operations is comprised 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.
"Hui wants to unlock value by causing other bidders to emerge sooner than they wanted," said Rochdale Research analyst Daan Coster. "When a stock is priced in the $1 range, there is a perception that there is a higher likelihood the company will go bankrupt and (Hui) wants to avoid other potential suitors going to bankruptcy court to buy Gateway or pieces of it" at a cheap price.
Hui holds a 4.93 percent stake in Gateway and has been selling a sizable portion of shares over a five-month stretch that began in March, according to a filing with the Securities and Exchange Commission.
"If he were to buy Gateway's retail business, he'd have higher costs than Gateway in operating it, since he has no other companies he could merge it into to get synergies," Coster said. "I think he's trying to unlock value by causing other bidders to come in."
Some analysts, including Coster, believe potential candidates exist that may step up to the table to grab Gateway.
"It's quite likely we'll see an acquisition or major investment in Gateway in the near future," said Sam Bhavnani, an analyst at Current Analysis.
Companies that are likely buyers include Acer, Fujitsu and Lenovo, which completed its IBM PC acquisition last year, Coster said.
Lenovo may wish to leverage its current PC manufacturing capabilities, as well as its management, to secure a presence in the U.S. retail market, Coster noted.
Acer and Fujitsu, meanwhile, may wish to build on their large retail presence in Asia and Europe with Gateway's U.S. market, he added.
Gateway said it is reviewing Hui's offer with its financial and legal advisers. The company is also planning to meet with a major investment group, which recently acquired a 10.2 percent stake in the company. That group is seeking to offer input on the company's business strategy and the selection of its next chief executive.
Hui, in his letter this week, said he was disappointed that Gateway has not engaged in discussions with him regarding his buyout offer.
He pointed to his Aug. 3 letter, in which he offered to acquire Gateway's retail operations for $450 million on a debt-free and cash-free basis. He noted that when Gateway acquired eMachines, it paid $262 million that was largely comprised of Gateway stock. Hui stated in his letter that he expects a sale of Gateway's retail business could close in the fourth quarter.
"I believe that management and the board need to adopt a sense of urgency to address Gateway's problems," Hui stated in his letter. "The landscape of the PC business has continued to evolve rapidly and Gateway has not reacted...I strongly believe that separating the retail business from the professional and direct business is the right strategic direction for Gateway and the only way for Gateway to enhance shareholder value."