Gateway a Promising Acquisition Target

| About: Gateway Inc. (GTW)

Gateway (GTW) has confirmed that it received unsolicited interest from Lap Shun Hui to acquire its retail operations.

Hui, a Chinese born technology entrepreneur, has some history with Gateway. In 2004 he sold eMachines to Gateway for $266m. On August 23rd 2006, Lap Shun Hui sent the shares higher by offering to purchase GTW's retail operations, which accounted for over 60% of its Q2 revenue, for $450 million. He also hinted towards a possible buy out of the remaining company, which includes the professional and direct segments. Management has yet to respond to the offer and is contemplating whether Jack is right about the retail segment being subsidized & that the other divisions of the company need to be separated.

S&P calculates the amount equating to $1.21 per share, for what is around 64% of the entire Gateway business according to 2nd Q revenues. The company acknowledges the news and plans to review the offer.

I believe that GTW's retail strategy is providing benefits by expanding its customer reach. However, due to a significant lack of market share, and strong competitors, speculating on this take-over can be rewarding but at the same time quite risky. Doubts will remain over Hui's suitability to lead the company effectively and ease the debt burden. However, I believe there is still value left in Gateway. GTW's PC shipments grew 15% vs 9% Industry wide. In GTW's August earnings, it reported a narrower loss than expected (0.02 vs 0.05).

With a significant brand presence in retail superstores such as Best Buy, Gateway has been boosted by higher volumes strength in the retail segment, manufacturing efficiencies, a favorable business mix and improving cost control efforts. I expect gross margins to widen to 7-8% compared with 06's projected 6.5%; no wonder some institutional investors are seeing hidden value.

Harbert Management which recently acquired a 10.2% stake in Gateway, sent a letter to management expressing interest in working with the company to build new and unlock existing value opportunities. With the recent HP acquisition, if not Hui, then it makes sense for Acer or Lenovo to buy Gateway. The reason would be to integrate their operations, leverage the relationships Gateway has built up with retailers, such as Best Buy, a possibility that is certainly on the mind of Lap Shun Hui.

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