Gateway shares up on IBM buyout rumors

Although officials at both IBM Corp. (NYSE:IBM) and Gateway (NYSE:GTW) declined to comment on the rumor, industry sources said IBM's need for a prominent direct-sales presence and Gateway's reported desire to merge with a deep-pocketed partner makes this second round of conjecture all the more interesting. "This is the second time I've heard this rumor and to be honest, it's not the stupidest thing I've ever heard," said Louis Mazzucchelli, an analyst at Gerard Klauer Mattison. "Both [companies] would complement each other's strengths."

IBM has made no secret of its plans to attack Dell (Nasdaq:DELL) in both the corporate and consumer PC markets.

IBM taking aim
The company recently directed its sales force to more aggressively go after Dell when making customer calls. IBM also has a market capitalization of $109 billion, enough to comfortably afford a high-flying company like Gateway.

Gateway, which has watched its stock price soar from 36 in mid-March to Wednesday's record high, continues to thrive despite some signs of disorientation in the board room.

Only last year, Gateway was on the verge of agreeing to be acquired by Compaq Computer Corp. (NYSE:CPQ). However, the deal was not consummated because Gateway's chief executive, Ted Waitt, backed out at the 11th hour.

Also, Gateway has embarked on an ambitious push into the retail market with more than 58 stores throughout the country. Now, instead of ordering Gateway PCs online or through the telephone, customers can hustle down to the strip plaza to test-drive their new computer.

Bad marriage?
Still, some analysts aren't convinced a marriage between IBM and Gateway would make much sense for either party.

To wit: If IBM wants to go after the big-dollar corporate PC market, why would it buy a company that specializes in direct sales to consumers, small businesses and schools?

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"Ted [Waitt] has been flailing about. The Compaq thing last year, his leasing of the stores and his personal move to San Diego. Things are not working as they should."

Dell doing no wrong
Both companies, however, realize something must be done to slow the Dell juggernaut.

Last quarter, Dell beat Street estimates by 2 cents a share, returning a profit of $305 million, or 44 cents a share, on sales of $3.92 billion.

From an investing standpoint, Dell can do no wrong. The company consistently beats analysts' expectations and the stock continues to grow at a surreal pace, shooting up 4 3/4 Wednesday to 95 3/4.

Dell's sales into Asia -- despite the general slowdown within the industry -- grew by 35 percent while European sales improved 62 percent. It's as if the rules don't apply to Dell. Profit margins grew from 22 percent in the year-ago quarter to 22.3 percent in what was supposed to be a bad quarter.

"There's nothing to slow this company down," said Megan Graham-Hackett, an analyst at S&P Equity Group. "They just keep finding new ways to dominate the competition. It's very impressive."

Competitors desperate?
Impressive ... and also frightening if you're a PC vendor in a market that demands sub-$1,000 machines -- or even sub-$500 machines -- but still must generate improved revenue for fickle shareholders.

"I think [Waitt] is looking for something and IBM is getting desperate, too," Merrin said. "Ted's learning that once you get to a certain size, there are no roses coming out of the feedlots."

First Call consensus expects Gateway to earn 44 cents a share this quarter and $2.25 a share in the fiscal year while IBM is expected to rake in $1.47 and $6.44 a share, respectively.