When computer maker Gateway agreed to buy smaller, closely held rival eMachines in 2004, its turnaround plan looked pretty clear. Incoming CEO Wayne Inouye would do what he did at eMachines: Kill what wasn't working, cut costs to the bone, and sell through big retail outlets. After that, Inouye had an ambitious plan to go all out for big sales to government and educational customers (see BW Online, 11/14/05, "Gateway's New Turnaround Tale").
But what worked for Inouye's near-miraculous turnaround at eMachines -- what effectively got him his new job at Gateway (GTW) after the merger -- has yet to bear fruit.
Now, Inouye's sudden and unexpected departure, announced Feb. 9, leaves Chairman Rick Snyder, a longtime Gateway exec under founder Theodore Waitt, in charge temporarily. Snyder had been Gateway's president and chief operating officer from 1996 to 1997. He's now CEO of Aredesta, a Michigan-based venture-capital firm focusing on nanotechnology.
Inouye's exit also suggests the job of fixing Gateway, once one of the computer industry's highest-flying stars, may be simply too big for anyone, at least in its current incarnation. Not to mention the cloud of uncertainty it leaves over a company whose financial future already looks bleak.
With its stock price hovering in the mid-$2 range (it closed Feb. 9 at $2.46, down 2% on news of Inouye's resignation), further declines open the door to a takeover, possibly an unwelcome overture from a rival vendor or a less-likely scenario involving a leveraged buyout. Were the stock to drop another 80 cents to 90 cents, Gateway's market cap would fall below $586 million in cash and marketable securities.
CAUTION SIGNALS. Inouye's resignation came exactly one week after Gateway reported dismal earnings for the fourth quarter of 2005. Sales for the year were $3.8 billion, only slightly ahead of $3.6 billion the year before. And while there was a $49.4 million profit, vs. a $475 million loss in 2004, more than $40 million of the income was directly attributable to legal-settlement payments from Microsoft (MSFT). The more accurate measure of Gateway's performance was its net operating income of $6.8 million, only a third the size of the $20.2 million reported for 2004.
Still, Inouye gets credit for bringing costs under control. Selling, general, and administrative expenses in 2005 were $339 million, or less than 9% of sales, compared with $909 million, or about 25% of sales, in 2004.
Analysts advised caution. "While characterized as voluntary, we believe his departure is likely related to Gateway's inability to reinvigorate its professional and direct businesses despite significant headway in retail, which has lower margins," Joel Wagonfeld of First Albany Capital wrote in a note.
POSSIBLE BUYERS. Charles Wolf of Needham & Co. in New York worried that without Inouye, Gateway might lose what momentum it had built up in the course of its attempt to reverse fortunes.
"I don't know that in his absence the new management team will have any clear focus," Wolf says. "On the conference call today, Snyder talked a lot about direct sales and professional sales, but frankly I've heard all that before. My conjecture is that the board sees a sale to another company as the only way out, and that Wayne may have opposed that."
So who would buy? Chinese PC concern Lenovo, known for its purchase of IBM's (IBM) personal-computing unit last year, comes to mind as one possibility. Wolf says Lenovo badly wants an entry in the U.S. retail market. "The question there is would they want to do it with the Gateway brand," he says. Acer, the Taiwanese manufacturer best known for its notebook business, but which is only a bit player in the U.S. market, might also show some interest.
One less-likely possibility could include a leveraged buyout. This possibility came up in 2002, when Lap-Shun "John" Hui, who was then sole owner of eMachines, approached Gateway founder Waitt with a plan to take Gateway private in a leveraged buyout combined with a merger with eMachines. Waitt was initially said to be interested in such a deal, but the plan ultimately fizzled as Gateway's stock price recovered some of its value in 2003.
SHINY PARACHUTE. But Hui, a reclusive Los Angeles entrepreneur who shuns the media's glare, remains the second-largest Gateway stockholder. After the Gateway-eMachines merger came together in 2004, he became Gateway's No. 2 shareholder behind Waitt, with control of 36.4 million shares worth nearly $90 million.
In 2001, Hui had engineered the $161 million leveraged buyout of eMachines after its stock foundered and it was de-listed from the NASDAQ exchange. After that buyout, he tapped Inouye, who had been a well-regarded executive at electronics retailer Best Buy (BBY) to turn the company around.
Snyder said during a Feb. 9 conference call that Inouye had made the ultimate decision to leave the company, after a "dialogue" with the board of directors. Inouye drew an annual salary of $587,000 in 2004, and holds more than 7.8 million Gateway shares worth more than $19 million. Half of those shares vested on Jan. 1, 2005, and the other half vested on Jan. 1, 2006. He's walking away with an additional $720,000 in severance, and health insurance for three years.
Snyder holds more than 1 million shares of Gateway, or less than 1% of shares outstanding. As long as he's at the helm, he'll be under pressure to boost their value, or turn Gateway over to a CEO -- or buyer -- who will.
Hesseldahl is a writer for BusinessWeek Online in New York
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