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Gateway Target of Activist Hedge Fund

Irvine-based Gateway Inc. has attracted a shareholder it might not want.

Harbinger Capital Partners Master Fund I Ltd., a hedge fund affiliated with Birmingham, Ala.-based Harbert Management Corp., has scooped up a 6.6% stake in the struggling computer maker, according to a filing with the Securities and Exchange Commission in late July.

The fund comes with a reputation as an activist shareholder.

Harbinger and its managers have garnered headlines for stirring up controversy in both high- and low-profile companies, sometimes in bankruptcy court.

The fund focuses on “distressed and special situation” stocks, according to its Web site. Gateway likely fit the bill after shares recently hit an all-time low.

Gateway’s cash hoard of some $425 million in cash makes a bankruptcy a non-factor.

Harbinger has become the third-largest holder of stock in Gateway, behind founder Ted Waitt and Brandes Investment Partners LP.

What the Harbinger stake means for Gateway isn’t clear. The move could be seen as a vote of confidence in the company. Or it could bring pressure for management to take more radical moves to turn around the company.

Gateway has struggled to turn a profit in the face of growing foreign competition and the two biggest players in the industry: Hewlett-Packard Co. and Dell Inc.

The company doesn’t have a permanent chief executive. Chairman Rick Snyder stepped in as interim chief earlier this year when Gateway’s former top executive, Wayne Inouye, left.

Inouye had had success boosting Gateway’s retail sales, but not so much luck at its direct or business units.

Harbinger isn’t likely to look fondly on Gateway’s most recent earnings report.

Late last week Gateway reported a $7.7 million loss in the second quarter, versus a profit of $17.2 million a year earlier. Analysts were looking for a profit. The company’s sales were up 5% to $919 million, though below Wall Street expectations (see related story, page 10).

Shares of Gateway slumped more than 5% after the earnings announcement.

Hedge funds have become more influential in playing activist roles at publicly traded companies, said Randy Lampert, managing director in New York investment banker Morgan Joseph & Co.’ s corporate finance department.

Lampert, who helped head up a study by Morgan Joseph on hedge fund activism, said he wasn’t familiar with Harbinger.

“Hedge funds have tended to take a leadership role in these activities because most other institutional investors are often the recipient of corporate funds,and therefore are less likely to take a leadership role,” he said. “We expect it to grow because the number of hedge funds continues to grow.”

Gateway declined to comment on Harbinger’s stake in the company. Harbinger couldn’t be reached for comment.

The hedge fund hardly has been shy. It has battled management of several companies,even utility boards.

The fund led a group of debt holders that guided Warren, Ohio-based WCI Steel Inc. out of bankruptcy earlier this year, according to the law firm Kramer, Levin, Naftalis & Frankel LLP, which represented the debt holders.

The lenders became the new owners of WCI Steel, with Harbinger emerging as the largest shareholder in the company.

The previous owner, Renco Group Inc., tried to battle for control of the company in court.

Renco lost when the United Steelworkers union reached an agreement with the debt holders on a new collective bargaining agreement earlier this year.

The union had “never before negotiated a collective bargaining agreement” with creditors “over the opposition of management and ownership,” the law firm said.

Harbinger was less successful with Sioux Falls, S.D.-based utility NorthWestern Energy Corp., even though the hedge fund was the largest shareholder, according to a Bloomberg story.

The utility was on the auction block last year. Harbinger filed lawsuits and proposed new directors in a bid to get the company to accept an offer by Rapid City, S.D.-based Black Hills Corp.

But NorthWestern instead went with a bid by Babcock & Brown Infrastructure Group of Australia.

Harbinger’s recent actions drew the rebuke of a judge in the Troy, Mich.-based Delphi Corp. bankruptcy proceedings.

Last month, U.S. Bankruptcy Judge Robert Drain ordered Harbinger to cut its stake in Delphi to less than 26.5 million shares.

The judge ruled its holdings,32 million shares,violated rules for the bankruptcy proceedings.

The court said that a shareholder who isn’t already a “substantial equity holder”,those with 26.5 million shares,but wants to buy that big of a stake must tell the court and Delphi, among others, Dow Jones reported.

Harbinger said it wasn’t aware it violated a court order when it boosted its ownership stake, according to Dow Jones.

But the hedge fund obliged. The Delphi attorney told Drain that Harbinger would seek the stock on the open market and donate any profits to an IRS-approved charity.

The hedge fund drew scrutiny over a similar-size stake in Portland-based Portland General Electric Co.

Harbinger took a 7.4% investment in the energy provider during the spring. The move drew scrutiny from the Public Utilities Commission of Oregon, which later told Harbinger it may need to seek approval for the ownership stake under Oregon law, according to regulatory filings and the commission’s docket.

With more than a 5% position in Portland General Electric, the commission said Harbinger had enough shares to potentially exert “substantial influence” on utility operations.

Harbinger has asked for a new hearing in the case, said Bryan Conway, manager of economic and policy analysis for the Oregon utility board.

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