• eweek April 18, 2004 The Gateway That Could Have Been

When PC maker Gateway closed a deal to acquire privately held competitor eMachines earlier this month, it ended a process that started more than a year ago and that might have ended very differently.

In an exclusive interview with Forbes.com, Lap Shun "John" Hui, the usually media-shy China-born entrepreneur who sold eMachines to Gateway (nyse: GTW - news - people ) in a deal valued at $290 million in cash and stock, said the merger was, in the long run, inevitable. But Hui disclosed that he initially wanted to buy out Gateway and take it private.

Hui, who is now Gateway's second-largest shareholder, said he first raised the possibility of acquiring Gateway with its founder and chairman, Ted Waitt, at a Las Vegas trade show in 2002.

"We met at Comdex 2002 and I told him our intention, and he said that may not be a bad idea," Hui said. "Then after that he changed his mind. We talked five or six times after that, and by that time the stock was trading at about five or six dollars a share and it would have been too costly to privatize the company."

Hui said he had engaged investment bankers at the Averil Capital Markets Group in Los Angeles to start raising money to buy Gateway as early as July 2002. Later that year, Gateway became a tempting target. In October of that year, it was trading at below cash value. On Oct. 16, 2002, it closed at $2.69 a share, or a market capitalization just shy of $872 million. As of Sept. 30, 2002, Gateway was sitting on about $433 million in cash and $696 million in marketable securities worth a combined $1.1 billion, or $3.48 a share, according to filings with the U.S. Securities And Exchange Commission.

"We thought we would have had to raise $1.2 to $1.5 billion," Hui said. A hypothetical $1.5 billion buyout of Gateway would have translated to $4.62 a share, a premium of about 33% of Gateway's cash value as of Sept. 30, 2002. Through a Gateway spokesman, Waitt declined to comment on Hui's interview.

Hui, now 49, was a founding director of eMachines, the maker of low-end PCs that was backed by two Korean electronics firms, Trigem and Korea Data Systems. (Hui made part of his fortune running KDS-USA, a U.S.-based distributor of KDS-made PC monitors that is independent of KDS.) EMachines went public on the NASDAQ exchange in March of 2000 but ran smack into the PC market slowdown, and was de-listed by May 2001 amid heavy losses.

Hui bought eMachines out for $161 million on the last day of 2001. He then hired as his Chief Executive Officer Wayne Inouye, a one-time vice president of electronics retailer Best Buy (nyse: BBY - news - people ), to manage the turnaround at eMachines. Hui described Inouye as "one of the best CEOs I ever met." By the end of 2003, Inouye had earned the moniker: eMachines had sales north of $1 billion and was profitable, with overhead costs of less than 6% of sales that were the envy of the PC industry (see "The McDonalds of Computers"). Inouye is now Gateway's CEO, having taken over that job as part of Gateway's acquisition of eMachines.

Diana Maranon, Hui's investment banker at Averil Capital, confirmed that the plan to buy out Gateway included plans to do many of the same things that Hui and Inouye did at eMachines. "[It] was basically a mini-case study of what they wanted to do at Gateway," she said.

At least part of that plan, Maranon said, would likely have included closing down Gateway's boutique stores in favor of mainstream retail sales. "Under the plan to go private, we never got down to this level of specific plans, but clearly under that plan John would have been a proponent for closing the stores."

That may add some important insight into how Gateway may change under Inouye's management. "Wayne will likely migrate a lot of the same concepts from eMachines over to Gateway," Maranon said. "But it's a much bigger company with a much more complex structure. He won't be able to move as swiftly as he was able to with eMachines."

Hui said he saw the combination of the two companies as more or less inevitable, based on their relative strengths in the three major segments of the PC market: direct sales, corporate sales and retail sales. Dell (nasdaq: DELL - news - people ) is the king of the direct market, but also has a sizable piece of the corporate market. It competes there with Hewlett-Packard (nyse: HPQ - news - people ), which also sells retail. Since Gateway relies mostly on direct sales, it needed a second front to compete against the other two. Buying eMachines gives it that second front--retail.

"Combining eMachines and Gateway gives you a tripod," Hui said. "Each of the three companies has two market fronts. From there you reach an equilibrium in the market."

Such a plan isn't sitting well with at least one retailer. Best Buy CEO Bradbury Anderson said last week that he was "troubled" by the combination of Gateway and eMachines. Best Buy has been, along with Wal-Mart Stores (nyse: WMT - news - people ) and Circuit City (nyse: CC - news - people ), one of the top retailers of eMachines computers. Anderson sees Gateway's stores as a retail competitor. "I think we will continue to sell eMachines, but we are troubled with the connection there," Anderson was quoted as saying in a Reuters report.

Hui has a significant personal stake in proving that his vision of the market is right. As part of the deal, he received 50 million shares of Gateway stock and $30 million in cash. He gave 12.5 million shares plus $7.5 million in cash to eMachines employees, and now has 37.5 million shares worth nearly $200 million based on Gateway's closing price on March 22.

Maranon said that before arriving at a final deal with Gateway, Hui had had the option of taking more cash and less stock. "He opted to take more stock," she said. "He thought that was where the upside is. He's putting his money where is mouth is."

Read the Forbes article