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Monday, August 21, 2006

Gateway: Blood From A Stone

Stocks: (GTW)(HPQ)(DELL)

Harbert Management and some "affilated groups" have bought 10% of Gateway, the troubled PC maker. Harbert is based in Alabama. They may regret leaving the state.

In a letter to Gateway's management, Harbert said they wanted to help the management and board improve shareholder value. The usual missive.

The problem is that someone forgot to tell Harbert that there is no value to unlock at Gateway. A company like Dell, Lenovo, or HP could have bought the company for a song and taken out tons of costs. But Gateway is not worth it.

While companies like Dell were going through hyper-growth, Gateway's revenue barely moved. From 2003 to 2005, the topline flatlined.

Revenue actually declined from the December 05 quarter to the March 06 quarter to the June 06 quarter. And, now the entire PC industry is in crisis, and trying to turn Gateway around is virtually impossible. The company relies heavily on Best Buy for retail sales and almost certainly has no leverage there.

For the quarter ending June 30, Gateway revenue rose 5%, about the same rate as Dell's. However, total revenue for the quarter was only $919 million. The company had an operating loss of nearly $7 million. Gateway has already cut its general and administration expenses from 10% of sales last year to about 7% this year.

Gateway has senior convertible notes of $300 million and $425 million in cash.

Getting back share in the PC game costs hundred of million of dollars. The market is dominated by a small number of companies. Even Apple would not have much of a computer business if it were not for the coattails of the iPod. And, Gateway has no miracle product to ride back to and improved position in the market or a balance sheet to get new customers.

Gateway's stock traded around $7 in late 2004. Now, even after the announcment that Harbert has taken a stake, the stock is at $1.54 barely above its 52-week low.

Someone ought to tell Harbert to hit the exits before it is too late.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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