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Chuck Brown, Assoc. Editor – News
January 30th, 2004

Gateway Buys cheap PC maker eMachines
San Diego, CA
- Gateway Inc., with hopes of reversing its declining market share and revenue in the personal computer business, announced this Friday that it would buy privately held budget PC maker eMachines Inc. in a deal valued at US$235 million. In the deal, Gateway will pay US$30 million in cash, plus 50 million Gateway shares to eMachines' owners.

Gateway will then become the third largest U.S. PC maker, with a seven per cent share of the market and the eighth largest brand in the world. The combined operation will have expected revenues of $4.5 billion and hopes to drive Gateway's return to profitability, which it expects to happen in 2005.

Gateway Chairman and Chief Executive Officer Ted Waitt will give up the CEO title to EMachines CEO Wayne Inouye, but will remain as chairman and will have an active role in Gateway's future, the company says. Inouye will also be named to the Gateway board of directors, Gateway sources report.

Waitt, Inouye and Gateway CFO Roderick Sherwood III will lead an integration team comprised of the two companies' senior executives that will focus on "rapid finalization and execution of combined cost-savings plans, channel and product expansion initiatives and other growth strategies."

Under the terms of the merger agreement, eMachines' chairman and principal shareholder, John Hui, as well as Inouye and eMachines' management team, have entered into stockholder agreements with Gateway that provide for certain holding periods, vesting periods and sale restrictions on Gateway stock. Under this agreement, these Gateway shares cannot be sold or hedged outside of the defined schedule over the next two years.

Gateway had just posted its 12th loss in 13 quarters again because of sharply declining sales and charges related to its market makeover from a personal computer maker to a broader




consumer electronics company. While their sales of plasma TVs, DVD recorders and MP3 players were reported to be strong, PC sales were not selling as expected.

Several sources reported that eMachines' fourth quarter was profitable, although as a privately held company eMachines does not reveal by how much. eMachines, which sells primarily through retailers like Costco, Best Buy and Circuit City, did $1 billion in annual revenue last year. Gateway said eMachines has been profitable for the past nine consecutive quarters. Gateway also proclaimed that the deal would enable it to return to "sustained profitability" for 2005.

"We've always struggled at the low end of the PC business," said Rod Sherwood, Gateway's chief financial officer.Gateway does not currently anticipate using the eMachines brand for its Professional Division, Waitt said.

Even with eMachines' retail focus, Waitt said he believes there will be multiple channels for customers to provide home networks, including a segment of customers that "are willing to pay for a high level of service and want everything installed [by] a variety of resellers and a combination of local integrators."

"It is really going to depend on the customer," Waitt added. "It is not going to be one size or slice fits all there."

Waitt would not comment on whether the deal could result in Gateway eventually closing its 190 retail stores. "We're going to look closely at our retail operations and determine what will allow us to retain the right mix going forward and to really develop the right relationships with our retail channel partners," he said. "We want to minimize any conflict." Currently, Gateway has no plans to sell the eMachines products through its own retail stores, Waitt said.

The acquisition is expected to close in the next four to eight weeks, Gateway officials said.

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