Could Gateway Buyout Rumors Be True?

Forbes has run an article noting than an Asian PC-maker is rumored to be buying Gateway (GTW-NYSE).  We recently ran a piece noting how difficult it would be to actually turn Gateway back around, and that will hold true if it is an Asian PC-maker doing the acquiring.  The rumored names are Acer and Lenovo, and if you go sneak around chat rooms you can probably come up with a half-dozen other companies whose names you could throw into the hat.  It would be hard for an American, European, African, or even a Martian PC-maker to turn around.  That doesn’t mean it can’t happen, because we have noted time after time in so many different industries that beauty is truly in the eye of the beholder.  To show both sides of the coin, there was a portfolio manager that recently said on CNBC with some conviction that GTW could go up to $5.00, and some Wall Street analysts have price targets above today’s $2.25 price.

There is one single saving grace here, and that is that the company does actually trade at a very cheap price-to-sales basis.  The reason for that is because they have proven that they are just not that profitable.  They would also more likely than not get to kiss away the US government business that may be one of the few areas where it can still save itself on its own.  Gateway is also about a year away from having that Microsoft-subsidy ending.

If there was much truth to the rumors the shares would probably be trading higher than $2.25 today.  What price would have to be paid in order to secure a buyout?  It would have to be substantially higher than today, even if the holders worries that the faced the company going to zero without a savior of a deal.  There are so many shareholders buried that we deem as "Long & Wrong" that would be fighting for a much higher price and it has been so much higher in the past that it is really not quantifiable on a cursory review to say what price it would actually take to get an approval from more than half of the holders.  Gateway still has some anti-takeover provisions left, although not as many as they used to have in place.

Regardless of where the buyer may or may not be, they would still be inheriting a shrinking company and a company that is challenged.  They would also be coming on to the US turf right at the time that Dell (DELL) is trying to revamp and turn their ship around.  They would also be acquiring a company whose liquid and hard assets barely pare off with all the liabilities in the company.  The good news is that they would be taking on the eMachines unit that still has some value, so it isn’t as though we don’t see anything else that can be shown as good news.

So how much would it take?  The company has a $836 Million market cap and carries $1.3+ Billion in liabilities.  Would it take $2 Billion to buy it?  Maybe, but who knows for sure.  If we had our own $2 Billion to make buyouts, we’d certainly be looking elsewhere instead of here.  It is still possible that someone wants it.  If so we would ask why the stock is not up much higher even though it is up in the last 5-days.  This certainly isn’t meant as a damnation to Gateway because it would be nice to see it turn around.  I am just personally glad it isn’t my job to fix Gateway, and I wouldn’t be committing the required capital to do the acquisition if it was choosing this one or others.

Jon C. Ogg
March 15, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.