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Hui's Move To Buy Gateway Continues

9/04/2006 02:00:00 AM Eastern

In a scene that could have been ripped from the script of a soap opera Gateway minority stockholder Lap Shun (John) Hui initiated a very public attempt to buy Gateway's retail operation.

Hui's Hollywoodesque buyout attempt has included a threat to take the fight public (since carried out) and a nasty condemnation of Gateway's business practices, and like any good afternoon soap, new characters have unexpectedly come into the story line.

On Aug. 23 Hui made public a letter he sent two days earlier to Gateway interim CEO Rick Snyder citing the reasoning behind his desire to buy the company's retail business for $450 million. The deal as offered would leave Gateway with its direct and professional business intact, while removing the retail segment. The letter was sent and then made public because Gateway did not respond to Hui's Aug. 3 proposal to strike this deal. In the letter Hui gave Gateway's execs until Aug. 22 to reply and agree to schedule meetings to discuss the potential deal.

“If I do not hear from you with an acceptable timeframe for substantive discussions by then, I will have to assume that Gateway and its Board of Directors do not wish to discuss my proposal further. In that event, I will not have any alternatives other than to make public my views on the strategic direction of Gateway and my proposal,” Hui wrote.

Gateway's response came on Aug. 23 when it issued a sparse statement stating, the Gateway board of directors will be reviewing the expression of interest with the help of its financial and legal advisors in accordance with its fiduciary obligations.”

The board was scheduled to meet on Aug. 23, according to a company spokesman, but no details were forthcoming regarding its agenda.

As all this was taking place, on Aug. 22 a hedge fund group led by Harbert Management bought a 10.2 percent stake in Gateway. The roll Harbert will play was unclear, but a report on MarketWatch quoted a letter from Harbert to Gateway expressing its desire to help save Gateway and the company has admitted to having held talks with these investors.

Hui was the founder of eMachines which he sold to Gateway in 2004 and is now Gateway's entry-level product brand. He is the second largest holder of Gateway stock after Gateway founder Ted Waitt.

Hui was highly critical of Gateway's current operation. He said that he has been a patient shareholder, but has grown tired of having his suggestions on how to run the company ignored.

“The landscape of the PC business has continued to evolve rapidly and Gateway has not reacted. Gateway's stock price has continued to decline and the failure to name a replacement CEO for over six months has left Gateway in a position where it is unable to clearly and credibly articulate its strategic direction to the market,” Hui said.

Hui said the retail business is subsidizing the direct and professional segments and only by separating the two could either business reach its full potential.

Gateway did not wish to refute Hui's claims at this time, a spokesman said.

Industry analysts agreed that Gateway's retail business is supporting the company and that the company has been lax in its search for a new CEO.

Steve Baker, NPD's industry analysis director for technology, said retail is propping up Gateway, unlike most vendors which tend to be primarily supported by the professional side of their business. Baker was less certain about the viability Hui's business plan.

“I don't agree that you can run a consumer retail business without some other profit legs,” he said, adding he was somewhat surprised at the tone the letter took.

Charles Smulders, Gartner's managing VP, thought it possible to make a go of Hui's idea, but he too was critical of Gateway's lethargic attempt to bring in a new CEO.

Snyder has run Gateway since Wayne Inouye was forced out as CEO last February after the company's board expressed its disappointment with the performance of its direct and professional businesses.

“Since Wayne Inouye left, Gateway has been looking for a silver bullet CEO to save the company,” Smulders said, “What they need to find is a CEO with a strong strategic direction for the company.”

In addition, if the deal were consummated he expressed concern over what the company could do with the remaining pieces of its business.

“They would have to sell off the professional side to either a hedge fund or a company already in that business,” he said.

Gateway is the number three PC vendor in the United States according to the research firms Gartner and IDC. During the past three years the company has undergone numerous changes that have included the elimination of its brick and mortar retail chain, the institution and quick removal of a line of CE products from retail and the insertion of Gateway branded PCs into the retail market after having only been sold direct to consumers.