White Cows in Green Fields? Gateway Shareholder Class Actions Proceed

Last September, Gateway Inc, a United States manufacturer of consumer computer hardware, announced its intention to accept a takeover offer made by Acer Inc, the American subsidiary of a Taiwanese hardware and systems manufacturer. Acer offered cash consideration of USD $1.90 per share, valuing Gateway at just under USD $710 million.

Well, it seems that some Gateway shareholders aren’t overly happy about this transaction, with two separate shareholder actions being initiated against the Gateway board last week, naming Acer as accessory. The substance of the allegations, relevantly contained in Gurt v Clarke (Case No CA3219-VCN) and Cin v Clarke (Case No CA3216-VCN), is as follows:

[1] ‘The Company’s directors breached their fiduciary duties to stockholders by approving the Merger Agreement and the transactions contemplated thereby, including but not limited to the Offer, and claims that these transactions are both unfair and coercive to the public stockholders in a sale of the Company’ …

[2] ‘The Company’s directors breached their fiduciary duties by failing to include certain information in the [offer document], which purportedly denies the stockholders a fully informed voluntary choice whether to approve the Merger Agreement or seek appraisal.’

As regards the second of these claims, it is unclear, from the statement of claim, just what this information was, and whether it was material, so we’ll have to wait and see how that one pans out. As regards the first claim, however, this seems more dubious on its face.

My first PC was a Gateway, so the brand holds a special place in my heart, but even on a generous valuation of the company it seems difficult to escape the conclusion that Acer paid too much, rather than too little, for the offeree. Gateway has struggled to compete with other large Original Equipment Manufacturers in the North American market — a decline which paralleled Dell’s rise to prominence and which began even before the .com crash. Hewlett Packard, meanwhile, has gone from strength to strength (corporate espionage scandal notwithstanding), while Lenovo has made strong inroads into the corporate market. Gateway, meanwhile, pulled out of the Malaysian, Singaporean, Japanese, Australian and New Zealand markets, and has done little since but produce a line of unremarkable laptops.

The Acer board appears to be placing a premium on Gateway’s right of first refusal over Packard Bell computers (a traditional rival of Acer). Indeed, Acer’s own shareholders have complained vocally that the price paid for Gateway was excessive. Speaking about post-merger concerns, Acer CEO Wang Jen-tang identified three issues:

The first is that we bought it too expensively. The second is that post-merger integration is normally always very difficult, so the integration will be too difficult, and the third is that Acer’s acquisitions in the past were mostly unsuccessful. … Regarding the criticism that the price is too high, I think whether a price is high depends on whether the buyer will in the end be able to realize synergies.

Interestingly, Acer’s CEO sought to justify the purchase in qualitative (synergistic) rather than quantitive terms. To put Acer’s offer into context, the previous year a private bidder offered USD $450 million for Gateway’s retail business, which the board rejected as inadequate consideration. (The bidder had previously sold eMachines to Gateway, which had subsequently lost value.) This suggests that there is at least some basis underlying the Acer shareholders’ discontent. In these circumstances, it seems difficult to say with any confidence that the Gateway directors acted without due care in accepting the favourable offer. It is therefore doubtful whether anything can come of the shareholder actions.