Gateway also believes the acquisition will be key to returning the company to profitability after three straight years of losses.
According to the agreement, Gateway will pay $30 million in cash and exchange 50 million shares of its common stock, currently valued at about $4.10, for a total of around $234 million.
The combination is expected to create the third-largest PC company in the U.S. market, and the eighth largest in the world. The two had combined revenue of $4.5 billion in 2003.
The merged entity plans to leverage eMachines' established retail relationships and distribution model in the U.S. and worldwide, as well as continue Gateway's direct sales.
Gateway also says it will adopt many elements of eMachine's lean operating model, which last year generated about $1.1 billion in revenue, a 40% increase over 2002, and has resulted in nine consecutive profitable quarters.
Gateway reported a loss of $514.8, or $1.62 a share, on revenue of $3.4 billion, as compared with a loss of $297.7 million, or 95 cents a share, on revenue of $4.2 billion in 2002. The company says it expects the acquisition of eMachines to help return it to profitability in 2005.
"eMachines has created an operating structure, growth trajectory, and reputation among customers that is a model for the future," said Ted Waitt, chairman, CEO, and founder of Gateway, in a statement. "They are bringing to Gateway a strong brand that has grown dramatically in value over the past two years relative to its retail competitors."
As part of the agreement, Wayne Inouye, eMachine's CEO, will become CEO of Gateway, and will be named to the Gateway board of directors. Waitt will remain as chairman.