Those were heady days, they were, back in 1999. The bull market was still roaring. We hadn't yet heard of hanging or dimpled chads. Gateway (NYSE:GTW) was the biggest seller of consumer PCs. America Online (NYSE:TWX) still had its own ticker symbol. And an $800 million deal between the two promised to create a single portal of access to the Internet through a host of appliances dedicated to the task.
Using the marketing power of AOL's then-18-million-member subscriber base, Gateway's 5 million PC customers, and 50,000 Gateway.net subscribers, Gateway was the first computer manufacturer to start its own Internet Service Provider (ISP) service. The deal would simplify access to the Internet because AOL would come preloaded on Gateway computers and appliances.
That was then, though. This is now.
Gateway announced that this "revolutionary" deal would be coming to an end as it moved to repurchase $315 million of its shares owned by Time Warner, which inherited them when it merged with AOL. The computer maker will pay $185 million in cash and give AOL up to $130 million in discounts on future payments required under their revenue-sharing agreement for the shares, which includes preferred stock and 2.7 million common shares.
In the end, the deal provided both companies with few of the anticipated benefits. Once thought to be potential PC killers, Internet appliances did not receive a warm reception. For new Internet users who they assumed didn't want PCs, the $500 price tag was too expensive. Even defunct Netpliance's $99 so-called "I-Opener" couldn't attract much interest. The company eventually re-engineered itself into a software company called TippingPoint (NASDAQ:TPTI) through a reverse stock split in 2000. Even manufacturers such as Hewlett-Packard (NYSE:HPQ) and 3Com (NASDAQ:COMS) introduced and then let die their own iterations of Internet appliances. The problem was that they did many of the same things that PCs did, just not as well, and consumers were unsure of what to make of them.
Gateway.net was not much of a success either. At one time it boasted as many as 600,000 subscribers before it dwindled away and subsequently folded. Remaining customers were later encouraged to sign up with AOL.
Gateway, the computer company, seems to be turning itself around, posting impressive third-quarter profits and acquiring competitor eMachines, a maker of low-cost, dependable computers. It's now back in the game as the No. 3 computer manufacturer behind Dell (NASDAQ:DELL) and Hewlett-Packard, and it still stands ahead of IBM (NYSE:IBM).
Making the deal now allowed Gateway to buy back the shares more cheaply, show management confidence in the company going forward, and put behind it an unfortunate chapter in its saga. Soon they'll be partying like its 1999.
Gateway competitor Dell Computer is a Motley Fool Stock Advisor recommendation. To learn more, subscribe with the benefit of a six-month, money-back guarantee.
Fool contributor Rich Duprey once drove a little red Corvette, but he does not own any of the stocks mentioned in this article.
