Gateway: From PC powerhouse to buyout bargain

Suitors once offered $7 billion for Gateway, but after a decade of missteps and bad luck, the company is snapped up for a modest $710 million.

Taiwan is a long way from Iowa.

But not as long as the distance that Gateway--the farm-raised, direct-sales PC company that grew into a major force in the U.S. computer industry--has traveled over the past two decades.
When Acer agreed Monday to purchase the American PC maker, it wasn't shocking, since more than a few pundits would say Gateway's acquisition has been several years overdue. But at a $710 million purchase price, it's a comedown for a company that in 1997 was offered $7 billion to become part of Compaq (which was eventually acquired by Hewlett-Packard).

A string of bad quarters, a revolving door into the chief executive's office and a schizophrenic business strategy have all led to Gateway's end as an independent company after 22 years in business. The economic downturn that began in 2000 hit Gateway particularly hard, and it never quite recovered. Its identity as a company was constantly in flux after that, expanding through retail stores, delving in the world of consumer electronics, and acquiring low-end PC maker eMachines. But none of the new strategies quite worked.

"Gateway's basically been up on eBay for the last couple years."
--Samir Bhavnani,analyst, Current Analysis West

Now it will be up to Acer, a Taiwanese company, to resuscitate Gateway's heartland image and compete with the PC industry's dueling giants, HP and Dell. To people who've watched Gateway's aimless adventures of the last few years, the new and focused management that will be at the helm is probably a good thing, and a long time coming. "Gateway's basically been up on eBay for the last couple years," said Samir Bhavnani, analyst at Current Analysis West.

Founded in 1985, the company was built on a direct-sales model--a la Dell--which was initially very successful. Gateway grew 20 percent to 30 percent from quarter to quarter at its peak in the '90s, making it the Acer of its day--the fastest-growing PC maker at the time.
In 1997, founder and CEO Ted Waitt rejected a proposed merger with Compaq, a deal that would have made Gateway the consumer arm of the world's largest PC operation at the time. After turning Compaq down, Gateway moved into software and services, financing and Internet connections.

But it wasn't as adept selling its PCs in cow-print boxes directly to business. In 1999, Waitt resigned and Jeff Weitzen took over as CEO. Then in 2000 a steep decline in demand hit the PC industry. Gateway's shipments dropped off quickly. The company went from moving 4.2 million units that year to 3.2 million in 2001, 2.7 million in 2002, finally bottoming out at 1.9 million in 2003, according to data compiled by IDC.

Then an economic recession hit. Things got worse. In 2002, Gateway began stocking its Gateway Country Stores--which were formerly just places for customers to place orders--with a variety of consumer electronics, such as cameras, video recorders, and most notably, plasma televisions. The company made a huge splash in the nascent plasma business by undercutting other vendors by hundreds of dollars. The strategy was applauded at the time, but it was a bust.
"At one time it was really focused on selling televisions and made a pretty big bet on the digital home...HP and Dell placed similarly large bets, but they also kept the focus on their PC business," said John Spooner, analyst with TBR.

Then, switching gears, the company scooped up eMachines, a low-end PC maker, in 2004. By then, Gateway had lost much of its shine, and much of the leadership from the much-smaller eMachines was brought in to run the company. "In reality, it seemed like eMachines was taking over Gateway, with its management structure, the way they marketed themselves, and priced themselves," Bhavnani said. eMachines Chief Executive Wayne Inouye moved over to run Gateway, and seven of 13 of the senior vice presidents appointed after the merger also hailed from eMachines.

Later that same year, the newly combined company announced it would begin closing its retail stores, which also meant cutting more than a third of Gateway's workforce. It was then that Gateway began cropping up on retail shelves, and TVs and other consumer electronics were cut out of the picture to focus better on its core business—PCs.

Inouye left in 2006 and company chairman Rick Snyder stepped in as interim CEO. Later that year J. Edward Coleman became the company's fifth chief executive in six years.

Finally, the company got back to doing what it does best -- building PCs. By then, it was worth one-tenth of its value at its peak. But there's still that brand, the biggest reason Acer wants the company. Acer will need it to compete in the U.S. market with Dell and HP.

"Who doesn't like the spotted dots, the cows, what they stood for, seeing (founder) Ted Waitt in the commercials with the pick-up trucks?" said Bhavnani. "It's a company that people rooted for."