March 11, 2004 3:10 PM PST

Gateway completes eMachines buy

Gateway said Thursday that it has completed its acquisition of low-cost retail PC leader eMachines, a move that will take the company further from its roots as a direct computer specialist.

Poway, Calif.-based Gateway said it is still evaluating how best to blend its direct sales effort with the retail method used by eMachines. However, Gateway said it expects its increased size to allow it to return to sustained profitability next year.

"This is a great day for both Gateway and eMachines," Gateway founder Ted Waitt said in a statement. "While there is considerable work ahead for us, I am confident that we will make fast progress at building a successful, profitable and growing company."

With the closing of the deal, Waitt is passing his chief executive duties to eMachines CEO Wayne Inouye. Waitt will remain as Gateway's chairman. Gateway announced its plans to acquire Irvine, Calif.-based eMachines on Jan. 30.

Gateway paid $30 million in cash and 50 million shares of Gateway stock to buy eMachines. Based on Thursday's closing price of $5.19, the deal is now worth $289.5 million, up from about $235 million when the deal was announced. Included in the 50 million shares were 2.4 million shares awarded to 29 top eMachines employees. Inouye's pay package includes the option to purchase 10 million shares of Gateway common stock at an exercise price of $5.19.

Separately, Gateway said that PricewaterhouseCoopers has decided not to continue its audit business with the computer maker. Gateway said it will seek a new auditor and added that there were "no disagreements between Gateway and PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure."

In addition to an increased presence on retail store shelves, the eMachines deal is expected to take Gateway back into several international markets. The company once sold its products in a number of foreign countries but retreated to North America as part of its cost-cutting efforts.

Many analysts believe that Gateway ultimately will abandon some or all of its namesake stores in favor of selling products at third-party retailers. However, they expect the company to continue selling Gateway-brand products, including PCs and consumer electronics, directly to its customers.

Gateway has declined to say what might happen to the stores.

Gateway spokesman Bob Sherbin said it is too early to say what will happen to the stores. During the next six weeks, the company will decide on its plans for the stores, where the company will keep its headquarters, and how it sells its products through retailers, he said.

"There will be other announcements in the weeks ahead," Sherbin said. The company last week said that it plans to slash 1,000 jobs.

Gateway closed 82 of its stores in 2003 as part of its cost-trimming efforts. But the company also remodeled its remaining 190 outlets to help showcase its consumer electronics products. At its peak, Gateway had 326 stores.

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Since the takeover, hope and pray that you don't have to send your computer back for repairs. I had to take mine back to Best Buy for repair of a power supply issue. Because it was still under waranty it had to be sent back to the factory (which they did). The factory sent it back with a new power supply (2 weeks) but Best buy found they or shipping had ruined the hard-drive. Back to the factory (1 week) where they ruined my graphics card and either they or shipping banged up the case so badly that Best Buy is shipping it back to them again. Best Buy's Geek squad would have been able make the repairs but as it is still under waranty it had to go back. Still no computer and we have been at this for a month now. Another E-machine, I don't think so.
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