Gateway purchase of eMachines foretells success--and layoffs.

Gateway Inc.'s pending acquisition of competitor eMachines Inc. could be the tonic the struggling Poway-based PC maker has been seeking.

Industry analysts applauded Gateway's decision, announced Jan. 30, to acquire the Irvine-based maker of lower-cost personal computers for about $255 million in cash and stock.

"Generally, it's a good move for both companies," said Toni Dubois, an analyst with ARS Inc., a technology research firm in San Diego. "Gateway has been struggling to try to regain a foothold in its market while eMachines has been doing some incredible things for the last year and half."

EMachines' capital was stretched thin, and its founder and owner, John Hui, stands to make a handsome profit from the sale. Hui reportedly acquired eMachines in 2001 for $161 million. Despite its problems, Gateway has nearly $1.1 billion in cash and marketable securities on its balance sheet.

Under the combination, expected to close in March, Gateway revenues would increase by about $1 billion, to $4.5 billion, creating the No. 3 PC seller in the United States behind Dell Inc. and Hewlett-Packard Inc.

With Gateway losing money and market share over the last three years, it had to make a bold move, analysts said. The firm's strategy of expanding its basic PC product line into other electronic equipment such as plasma televisions and digital cameras wasn't taking hold.

"They've got to find something different because they're going head-to-head with Dell," said Bruce Ahem, a San Diego-based technology consultant.

While Gateway's PC business has imploded, sales of lower-priced eMachines computers have been rising steadily, said Roger Kay, a PC analyst with International Data Corp. in Framingham, Mass. More impressive is how the company reinvented itself to become one of the leanest in the industry, he said.

Under the leadership of Chief Executive Wayne Inouye, who took over in 2001, eMachines recorded nine consecutive quarters of profits and increased the firm's share of the retail market to 25 percent from 9 percent.

Inouye will be given the chief executive title held by Chairman Ted Waitt since 2001.

"It's very clear Wayne has been brought in to make the cost structure at Gateway look like the cost structure at eMachines, and it's pretty clear the way he's going to do that is by laying people off," Kay said.

Gateway has about 7,500 employees, including 550 at its Poway headquarters, after cutting head count by nearly 5,000 in the past two years. By contrast, eMachines has only 138 employees in Irvine. All its manufacturing is done in South Korea and Taiwan.

Analysts said they expect Gateway to use eMachines sales channels in such large chains as Best Buy, Circuit City, and Wal-Mart to push Gateway's products.

Where that leaves Gateway's existing chain of 189 stores is uncertain. It closed 80 stores last year, and Kay expects more stores will be shuttered.