Gateway Investor Group Wants Change

Gateway has confirmed a request by Firebrand Partners to add three unidentified members to the computer maker’s board of directors. Firebrand is part of a shareholder group that owns 10.7 percent of Gateway’s shares.

Firebrand also asked that Gateway redeem its shareholder rights plan and call a special meeting of shareholders to declassify the current board.

Gateway’s board currently consists of seven independent directors plus Gateway CEO J. Edward Coleman. In a statement, the company said a committee of independent directors would meet to review the request and make a recommendation to the full board.

A Gateway  spokesperson told the company would have no further comment until after the meeting.

Analyst Roger Kay smells trouble.

“There is hostility in the gesture by the investor group and it’s the kind of move that can lead to a hostile takeover attempt,” said Kay, who heads Endpoint Technologies Associates.

“In my recent discussions with Gateway, they said their conversations with [Firebrand] have been cordial and productive and they’re rather taken aback that this action was taken without talking to them first.”

The request from Firebrand founder and CIO, Scott Galloway, in the form of a letter to Gateway’s top executives, was reported to the Securities and Exchange Commission.

“We believe there is a great deal of common ground and that we share a workable vision of how shareholder value can be restored,” said Galloway in a friendly opening.

But the letter ends on more ominous terms:

“The steps we have outlined above reflect our continued enthusiasm and resolve to work with the Board and management for the benefit of all Gateway shareholders. We request a response by October 31, 2006 to confirm your intention to comply with our requests. If we do not hear from you, we will take your silence as a sign of unwillingness to work together and will pursue these matters on our own, through the calling of a special meeting or otherwise.”

Galloway also said he was “…troubled that the Board appears to lack the sense of urgency to address the Company’s challenges and capitalize on its opportunities. A company with a great brand and channel strength, but 5.5% gross margins, requires a Board whose oversight and experience can aid in the development and articulation of a strategy to improve margins. We believe that continued inertia at the Board level is unacceptable.…”

Kay said the last thing Gateway needs now is an internal battle.

“Management is trying to nurse Gateway along, and to do that you need people to cooperate.”

Once a top PC player, Gateway has struggled in recent years, though it is still a well-known consumer brand and the third-largest PC company in the U.S., according to recent figures by IDC.

Gateway has 6 percent of the U.S. market, trailing Dell and HP at 31 percent and 22, percent respectively. Apple is just a shade behind Gateway with a 5.8 percent share.

Kay said he thinks Gateway can bounce back, and he’s impressed by some of the products it has on tap for the holiday season.

“They don’t have the money to innovate on the level of an HP, but Gateway has some really good technology and good distribution through Best Buy and others.”

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