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Remember Gateway?

Alexei Oreskovic

It's also suddenly in demand.

On Wednesday, eMachines founder Lap Shun Hui announced his desire to buy Gateway's retail operations for $450 million.

The offer came two days after it was revealed that a hedge fund consortium picked up a 10% stake in Gateway, stating its intention to assist the company "drive the business and build value."

As a turnaround project, Gateway is a bold bet.

No less of a tech giant than Dell(DELL) has been humbled by the evolution of the PC market, as competitors have learned to emulate Dell's prowess assembling computers at rock-bottom costs. And Gateway in particular faces an uphill battle winning small-business customers as Asian rivals like Lenovo and Acer step up their efforts in the U.S.

But that didn't seem to faze Wall Street, with Gateway's shares gaining 27 cents, or 15.7%, to $1.99 in recent trading Wednesday.

According to Pat Adams, the chief investment officer of Choice Funds, the surge of interest owes more to valuation than anything else: The stock got too cheap, he says.

A year ago, Gateway traded at $4; in December 2004, the stock was nearly $7. The sense that investors left the company for dead was reinforced in July when Gateway was dropped from the S&P 500.

"I could see how you could make the case that there's value here," says Adams, who does not own shares of Gateway. "The $64,000 question is, how do you turn it, and how do you realize the value?"

While an attempt to make Gateway fit enough to duke it out in the PC market could be a messy endeavor, Adams says a more promising scenario in the minds of some investors may be liquidating the company, although he says it's unclear who would want to buy Gateway's various pieces.

On the other hand, Current Analysis Director of Research Samir Bhavnani says Gateway still has a lot going for it, including its brand equity.

"Basically, Gateway is a rudderless ship," says Bhavnani, whose firm provides companies with strategic consulting and market intelligence, but does not currently count Gateway as a client. Gateway is suffering from a lack of identity at the moment, but at its core there's a lot to like, he says.

The No. 3 PC maker in the U.S., Gateway generates close to $1 billion in sales every quarter, and has $425 million in cash on its balance sheet.

But the company has struggled to find its niche in a changing PC market, indecisively juggling retail sales, direct online sales and sales to corporations and government with varying degrees of success.

During its most recently completed quarter, Gateway swung to a loss, as its gross margin level was cut in half to 5.5% from 10% a year earlier.

In February, CEO Wayne Inouye unexpectedly resigned and Chairman Rick Snyder took over on an interim basis. Six months later, the company still hasn't appointed a permanent chief executive.

In his letter offering to purchase Gateway's retail business, Hui said the PC maker lacks a sense of urgency. Its failure to appoint a new CEO "has left Gateway in a position where it is unable to clearly and credibly articulate its strategy direction to the market."

Most importantly, wrote Hui, Gateway needs to separate its retail business from its other business, as each requires different sales strategies and has different margins and business models.

Current Analysis' Bhavnani notes that Gateway's retail business has a lot of potential. With 70% of Gateway's retail PC models currently sold in Best Buy stores, Gateway has lots of room to expand the business by striking deals with other retailers, he says.

The diversification also would make Gateway much less vulnerable.

"If Best Buy pulls one's shelf spot, that is going to significantly impact Gateway's revenue," says Bhavnani.

Whether Gateway opts to shake up its retail business through Hui's offer or on its own remains to be seen. The company said Wednesday that it is "reviewing" Hui's unsolicted bid with the help of its legal and financial advisers.

For the first time in months, though, Gateway has once again captured the Street's attention.