Gateway, ACS Slide on Cancellation of Outsourcing Deal

Following its acquisition of eMachines and big layoffs, the consumer electronics peddler no longer needs ACS' services.
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Updated from 1:00 p.m. EDT

Gateway

(GTW)

shares slid on news it has broken off its contract with tech outsourcing concern

ACS

(ACS)

, as investors worried that the struggling consumer electronics vendor might have to shell out extra cash to exit the agreement.

A Gateway spokesman suggested such concerns are off base, but Gateway's stock was recently down 59 cents, or 13.1%, to $3.91.

Gateway spokesperson David Hallisey said any charges related to the early termination of the ACS contract are included within restructuring costs the company has already outlined.

At the time of its first-quarter earnings report, Gateway said that in calendar year 2004 it expects to record restructuring charges of $400 million to $450 million, mostly for asset writedowns and severance payments. Gateway won't break out the precise cost of the ACS deal within that larger sum, Hallisey said.

ACS shares were recently off 60 cents, or 1.3%, to $46.43, although the company said in a press release that the early termination of the contract would actually help its revenue and earnings for the rest of 2004.

Gateway awarded a seven-year contract to ACS last fall to handle its information technology, human resources and accounting services.

ACS explained in a release Monday morning that Gateway terminated the contract after it acquired

eMachines

in March 2004, in line with a broad revamping of its business strategy.

"Unfortunately, recent developments dramatically reduced Gateway's need for our services, and the partnership we initiated last fall no longer makes sense for either party," said ACS Chief Executive Officer Jeff Rich.

At the end of April, Gateway announced

yet another in a series of massive downsizings that will shrink its payroll by nearly 75% between the close of 2003 and the end of this year.