54.7 F
Laguna Hills
Monday, Mar 18, 2024
-Advertisement-

Industry Consolidation Heats Up Gateway Talk

The rumor mill is churning again for Irvine-based Gateway Inc.

Shares of the struggling computer maker got a boost recently after buyout talk heated up over news that China’s Lenovo Group Ltd. plans to buy European PC maker Packard Bell.

The tie: Orange County businessman Lap Shun “John” Hui.

Hui, who owns Packard Bell, is said to be close to sealing a deal to sell it to Lenovo. He also holds about a 3% stake in Gateway, left over from the days when he sold Irvine’s eMachines Inc. to the company in 2004.

Hui, a Hong Kong native, bought Packard Bell last year for an undisclosed amount. It’s now one of the top three computer makers in Europe.

News of the Lenovo and Packard Bell deal sent Gateway shares up as much as 8%.


Nothing New

Buyout chatter is nothing new for Gateway.

Earlier this year, Gateway shot down rumors it could be bought by Taiwan’s Acer Inc., which stands to get a foothold in the U.S. market with a deal.

But Hui stirred up talk recently when he told the Financial Times that he saw consolidation down the road for Gateway and its peers.

A year ago, Hui made a $450 million bid for Gateway’s retail computer business and also offered to buy the entire company. Gateway declined the offer and said it wasn’t for sale.

A Gateway spokeswoman declined to comment for this story.

Some analysts see a buyout as Gateway’s only option for a comeback.

Rick Hanna, an analyst with Morningstar Inc. in Chicago, long has said that Gateway needs to nix sales to businesses and focus on consumers,a part of the business that would make Gateway attractive to a potential buyer.

The company’s second-quarter sales fell 8% to $841 million. Wall Street was expecting $953 million in sales.

The lower revenue overshadowed Gateway’s $1.9 million profit for the quarter, which reversed a $7.7 million loss a year earlier.

“More competition for shelf space from Dell Inc., Acer and Lenovo should continue to pressure both revenue growth and overall profitability,” said David Bailey, analyst at Goldman, Sachs & Co. in New York, in a research note.

The company said it burned through about 20% of its cash, or about $62 million, to keep operations running during the second quarter.


Good Buys

Lenovo, the world’s No. 4 computer maker, is likely to find Gateway, along with Packard Bell, good buys, according to Hanna.

Lenovo’s 2003 buy of IBM Corp.’s PC business helped the company get into computer sales to businesses.

The logical next step for Lenovo would be to go after U.S. consumers.

“When you look at U.S. consumer and retail, you have to consider Gateway because that’s its bread and butter,” Hanna said.

Despite the company’s woes, Gateway’s strong brand recognition and growing retail business still are attractive, he said.

During the second quarter, Gateway’s sales in stores made up more than 70% of its revenue.

“Gateway’s retail channel has been the most profitable and has had the fastest growth,” Hanna said. “The thing that’s hurting Gateway is their weak competitive position and not having the global scale to wring out inefficiencies in their operations. Someone like a Lenovo would help those weaknesses.”

If Lenovo did make a bid for Gateway, the company could sell for cheap.

“Support for (Gateway’s) stock is quickly evaporating,” Goldman’s Bailey said.

Lenovo could buy Gateway for about $690 million, or $1.85 per share, he said. Gateway counted a recent market value of about $448 million.

For now, Gateway is pushing ahead with a cost-cutting program and new products. It recently announced a new notebook and PC line for China, a market the company hasn’t tapped into before.

The company also launched a line of colored laptops in an effort to boost its shelf appeal and compete with those made by Dell and Hewlett-Packard Co.

Despite renewed takeover talk, some analysts have their doubts.

“These trends are short-lived,” Hanna said. “How much of that Gateway will be able to retain long term,that’s still a question mark.”

Want more from the best local business newspaper in the country?

Sign-up for our FREE Daily eNews update to get the latest Orange County news delivered right to your inbox!

-Advertisement-

Featured Articles

-Advertisement-
-Advertisement-
-Advertisement-
-Advertisement-

Related Articles

-Advertisement-
-Advertisement-