Replies to post #63116 on e.Digital Corporation (fka EDIG)

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Gateway ends service pact with Affiliated Computer




Monday May 17, 3:16 PM EDT

(Recasts, adds ACS comment, updates stock prices)

NEW YORK, May 17 (Reuters) - Computer maker Gateway Inc. (GTW) has ended a services contract with Affiliated Computer Services Inc. (ACS) and will handle its own information technology, human resources and accounting, ACS said on Monday

Gateway shares fell 12 percent amid fears the company may have to pay a sizable fee to ACS for ending the contract, which was signed just last September and was supposed to run for seven years and be worth $400 million.

"If Gateway gets to change their business strategy, it needs to pay Affiliated to unwind the investment Affiliated has put into the contract," said Joseph Vafi, an analyst with Jefferies & Co.

Gateway has closed its 188 retail outlets, eliminating about 2,500 positions, and plans to cut an additional 1,500 jobs, which ACS said reduced the need for its services.



A Gateway spokesman confirmed that a break-up fee was involved but declined to give a specific figure.

ACS spokeswoman Lesley Pool said the company would receive a termination fee and would be compensated for assets to be transferred back to Gateway and services performed in the transition period.

Gateway spokesman Bob Sherbin said the break-up fee was included in restructuring estimates the Poway, California-based company provided when it reported first-quarter results late last month.

"These (estimates) anticipate full-year restructuring costs of $400 to $450 million, the great bulk of which covers asset write-downs and severance payments," Sherbin said.

Gateway has said it still expects to be profitable for 2005.

Dallas-based ACS said the contract termination would have a positive effect on its revenue and earnings for the rest of the year, but its shares fell slightly. Its fiscal year ends in June.

It said the contract produced revenue of $14 million during the quarter ended March 31 and was valued at $55 million a year.

Gateway shares were down 54 cents to $3.96 in afternoon trading on the New York Stock Exchange, while ACS shares were down 31 cents to $46.71. (Additional reporting by Duncan Martell in San Francisco)