Gateway-eMachines Merger: Beware the Retail Juggernaut?

Carly Fiorina got it right: For some time, the HP CEO has been saying the marketing will continue to consolidate, and todays news that Gateway plans to buy eMachines proves the wisdom of her words. Interestingly, this merger was prompted more by Gateways desire to expand its retail presence than any move to push online sales. And if HPs and Gateways collective acquisitions lock down U.S. retail, both Dell and IBM may be caught flat-footed.

Gateway has simply been unable to bring its costs in line with Dells. By contrast, eMachines is more efficient then Dell, and it is eMachines CEO Wayne Inouye who has been tapped to run the combined entity. There will undoubtedly be some cuts, but with Inouye at the helm, they will likely be better-balanced between the two corporate parents.

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One of the quiet beneficiaries in this merger is AMD, which lost Gateway some time ago when the PC maker went Intel-only. eMachines is one of AMDs biggest clients, and it has made a good business selling low-cost products based on AMD technology. As the combined company focuses on cost and increased competition in retail, AMD again becomes a strategic partner for Gateway; the merger could increase AMDs sales and expand Gateways tool set.

Finally, the new converged consumer-electronics market is still largely retail. Gateways push into the market was heavily product-focused, but Gateway lacked the retail sales channels effectively to move products that led markets in several categories. eMachines channels may help further this effort; however, eMachines is not a CE vendor, and Gateway will still need to fight for shelf space. Nevertheless, it provides Gateway with a brand it can sell retail without creating conflicts with its own stores or direct channel; managing that brand is likely where the interesting work will be done.

In the end, this looks to be about as perfect a match as we can get in a merger. The risks are relatively low, the price paid is a good value for what Gateway is getting, and the benefits seem clear and achievable. It will take about 18 months for the major financial benefits to hit on the cost side. However, we should know by the end of the fourth quarter whether Gateway can demonstrate the benefits on the revenue side.

In short, both companies are stronger then they were, and that has to be good news for buyers of either companys products.

Rob Enderle is the principal analyst for the Enderle Group, a company specializing in emerging personal technology.