November 2, 2004 5:00 PM PST
Gateway closes AOL chapter with stock buyback
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The Irvine, Calif., company said it will move to repurchase Series A and Series C preferred stock and up to 2.7 million shares of common stock. It will pay Time Warner $185.6 million in cash and allow its partner up to $130 million in discounts on future payments under revenue-sharing agreements, for a total of $315.6 million.
Gateway sought to make the deal now because it would have had to repurchase the stock for a higher price in December, a company representative said.
"It's something we're glad to put behind us," the representative said. "We believe that it minimizes potential dilution (of Gateway stock) for our shareholders. If anything, it shows that we're bullish on Gateway stock."
Time Warner also welcomed the move.
"We are pleased to have reached this agreement, which is mutually beneficial to both parties," a Time Warner representative said.
The buyback ties up the loose ends of an October 1999 agreement under which America Online, now part of Time Warner, pledged to invest $800 million in Gateway. The deal was designed to position the partnership as a single point of access for computer equipment and Internet service.
As part of that pact, Gateway agreed to help AOL market its Internet access service, to work with its partner on developing Internet appliances and to load AOL access software on its PCs. In return, AOL became the backbone for the Gateway.net Internet service provider.
Over time, the Internet appliance effort wilted, and Gateway shuttered its ISP, shifting customers to AOL. That left the companies with, essentially, a software bundling agreement and dissolved the distinct nature of their relationship.
Gateway, an aggressive pioneer in branching out beyond PCs, eventually gave up on those efforts and has recently embarked on a journey to return to its roots as a PC maker. It acquired rival computer maker eMachines in March.
The company said Tuesday it will continue to load AOL's Internet access software on the PCs it sells. In addition, Gateway will continue to offer six months of free AOL access with its own-brand computers and three months with eMachines PCs, a company representative said.
It's unclear how much the partners benefited by their arrangement. A Time Warner representative said on Tuesday that the company paid out only $600 million of the $800 million it pledged. It also wrote down $325 million related to the investment between 2001 and 2002.
The deal also put AOL in position to add some members. The Gateway.net service, which at one time had 600,000 subscribers, was the first ISP launched by a major PC maker. However, ISP customers were encouraged to move to AOL after Gateway discontinued the effort to cut costs.
More than anything, it was timing that hurt the alliance, one analyst said, as consumers saw limited value in the content provided through Internet appliances during 2001.
"The problem with the relationship was relatively simple, in that it was based more on the concept of pushing content to the consumer market," as opposed to focusing on hardware, said Brooks Gray, an analyst with Technology Business Research.
The idea of a home appliance that delivers e-mail and Web surfing has yet to catch on with consumers. "The consumer market is still struggling to implement home electronics...and integrate multiple devices across the home," Gray said.
CNET News.com's Jim Hu contributed to this report.
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