Lessons from Gateway’s Demise

This is the Gateway computer stock chart from 1995 to the present. It isn’t pretty.

Trading as high as $84 at the height of the tech boom in 1999, it is now trading at $1.85. A few weeks ago, Gateway threw in the towel and agreed to be acquired by Acer. It is the best that can be hoped for Gateway shareholders.

While the brand is still recognizable (remember the cows?) and scores high in consumer surveys, there is, frankly, no way to make much money off of mass producing computers.

The CEO of Acer, the company that just bought Gateway, has taken heat from shareholders and the financial press since announcing the deal. In an interview with the Financial Times, he basically admits that they were making zero profits on selling computers in the United States:

The key argument that Mr Wang presents to make his case is that Acer’s growth would be unsustainable without the acquisition.

“What has vexed us most in the past year is that, although I make almost$3bn [in the US market], my profit has been very tiny,” he says.

He adds that the only way Acer could squeeze into the US market after years of failures was with net margins close to zero, a fact that has dragged down Acer’s overall performance.

The reason is the company’s weak brand recognition in the US, which, argues Mr Wang, would take up to $100m to improve, with no certain results.

Taking over Gateway, a trusted brand with 96 per cent recognition among US consumers, is a promising alternative, he says, and will hopefully allow Acer to lift its net margin in the US to 2-3 per cent within two years.

Wow- 2 to 3 percent margins? Sign me up to buy into that company right now. NOT!

So it makes you wonder: whither Dell?

Gateway has a powerful brand. It even had a charismatic founder who returned to the company to try and “rescue” it (much like Michael Dell is attempting at Dell.) Who doesn’t like Dell? I’m typing on one right now.

But the lesson is in the margins. How many computers do you have to sell to keep growing if all you’re making is 2 to 3 percent? A heck of a lot of computers.

Gateway and Dell are “tech” companies, or at least that was how everyone categorized them. In fact, Dell has been lumped in with the other “tech titans” (Cisco, Intel, Microsoft, Oracle.) But is it? Or is it just another manufacturer trying to sell a low margin product to the masses but that product just happens to have some computer components?

Be careful in investing in companies that have no way to improve margins.