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Gateway: Sun's Next Acquisition Target?

Gateway: Sun's Next Acquisition Target?

A Sun acquisition of Gateway is probably unlikely, but it would seem to make a lot of sense. A move of this type requires the executive team of the acquiring company to admit they don't have the "right stuff," and that has only really happened once in the last several years.

By Rob Enderle
07/18/05 5:00 AM PT

We spend a lot of time forecasting the death of Sun these days. Employees have probably forgotten how to spell the word "morale," acquisitions seem more focused on distracting stake holders from clueless executives, and there often seems like a plan to develop more never-to-be-executed, silly strategies there than at any other company that has ever existed.

Another company, Gateway, had problems that seemed, a little more than a year ago, very similar. On a fast path to going out of business, Gateway was constantly promising, but never actually achieving, any type of sustained profitability or growth. Then, instead of buying a large, slow-growth storage firm, the company bought an executive team that could execute -- and now we can see clearly what a difference a year can make.

Most Successful Peer Merger in Tech

Gateway's acquisition of eMachines is arguably the most successful of the tech mergers between peer companies recently. The end result not only strengthened eMachines' opportunities, it also returned Gateway to profitability and growth.

Before the merger, government accounts were avoiding Gateway like the plague because they increasingly didn't like its products and they weren't sure Gateway would be around to service them. Recently Gateway won large bids from the University of Arizona, Dakota State University, the U.S. Air Force, and the government of the State of California, all over a very short time, indicating that Gateway is back, with a vengeance.

Of these bids this last is the most interesting because the State of California has divided its business among three vendors. Historically, for bids like this, the three chosen would have been Dell (arguably the strongest vendor in the space), IBM (mostly for laptops), and HP (because they are the most powerful California vendor).

In this instance Dell didn't make the cut; Gateway took its place. Gateway is the only vendor involved in virtually all of the categories except printers, where HP stood alone. No other vendor was so blessed. In addition, the first laptop sale didn't go to IBM but went to Gateway which, until recently, wasn't even considered to be in IBM's league in this product category. Now part of that might have been due to this year's deal with Lenovo, which bought IBM's PC business, but still, Gateway managed to beat out HP for the spot as well.

This is how a merger should work; instead of just buying a company in a vastly different business, the purchasing firm should correct, first, its own critical problems.

The Harvard Business Review a few months ago reported that external CEOs have an 18-month expected incumbency often because they simply can't adjust to their new staff and company.

What If ...?

Sun has always lacked any competence on the desktop. The company's SunRay1 thin client product was technically very compelling but remains one of the biggest inside jokes in the industry. Sun employees are famous for complaining about the performance of this system which forms the core of Sun's operations infrastructure and helps both to cripple Sun and to showcase its lack of competence on the desktop.

In addition, Sun has repeatedly demonstrated that it simply can't execute at an executive level anymore. Meanwhile, Gateway's new executive team is clearly executing very well. This same executive team, flush with a successful reverse acquisition, could probably do the same thing for Sun -- though they probably would have to undo many of the mistakes of the current management.

Simply replacing CEO Scott McNealy, which is often raised as a likely possibility, would probably not correct Sun's problems quickly enough and any new executive would have to deal with the dysfunctional nature of the team coupled with resistance to change. Under those conditions it is unlikely that even the best CEO candidate would be successful.

As for Gateway, while the company is strong on the desktop it is light on servers. Gateway has a limited offering of these components that is impressive but still, the company lacks credibility as a server vendor and has nothing at this point that scales to where Dell can play -- let alone Sun or HP. Gateway is also trying to move internationally and Sun already has what once was a robust international presence which could both accelerate and lower the risk of such a move.

There is virtually no product overlap between the companies, and Sun's services unit could be enhanced to pick up Gateway's lines to turn the combined company into a much more credible competitor to IBM. Given IBM's own lack of direction and the divestiture of its PC division, a newly combined Gateway-Sun entity could share in the increasing windfall coming from IBM's missteps, currently enjoyed by Dell and HP, more successfully.

Why the Combo's Unlikely

However, unlike Sun, Gateway is doing well and could probably grow organically into the markets it wants to target both in geographic breadth and server product depth. Sometimes going slowly is less risky, and acquiring a company that is in trouble can drain your resources and shake up your team when you most need them to be focused.

This makes it less likely that Gateway would want to buy Sun at this time and more likely that the company will focus financial resources on expanding into new geographies and raising the visibility of the Gateway brand. As a matter of fact, last week Merrill Lynch released a survey reported by Rex Crum of MarketWatch which showcased that Gateway is moving aggressively in retail -- Gateway now has 15 percent of the available shelf space. According to the report Gateway had no shelf space at all just one year ago.

As a result Gateway is probably not looking for a merger mirroring, reasonably closely, the situation that existed between Gateway and eMachines before that merger was negotiated.

Don't Hold Your Breath

A Sun acquisition of Gateway is probably unlikely, but it would seem to make a lot of sense. A move of this type requires the executive team of the acquiring company to admit they don't have the "right stuff," and that has only really happened once in the last few years (the NeXt acquisition by Apple had the same result but only because Steve Jobs executed a coup and forced out Apple's existing executive team).

Sun's board could, and probably should, move in this direction anyway because it represents one of the few moves that could significantly improve Sun's outlook. But the company appears to be mostly old-school, remaining tied to the CEO in a reverse dependency. As a result, they are more likely to want to move against the existing Sun executive team.

For the most part, this is all just interesting speculation. However, remember HP's recent executive change seemed just as impossible and now, in hindsight, it doesn't seem so difficult at all. Stranger things have happened this year -- and it is far from over.


Rob Enderle, a TechNewsWorld columnist, is the Principal Analyst for the Enderle Group, a consultancy that focuses on personal technology products and trends.


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