I Built This Company, I Can Save It Retired Gateway CEO Ted Waitt shocked the computer world when he ousted his successor and seized control. For the first time, Waitt reveals what's been going on inside the troubled company--and his plans to turn Gateway around.
By Katrina Brooker

(FORTUNE Magazine) – Early on a mid-March morning--on what happens to be the first sunny day in North Sioux City, S.D., since October--Ted Waitt comes home. Walking quickly across a small courtyard where piles of hardened snow are just beginning to melt, he opens the door to Gateway's manufacturing plant here. Inside at Earl's Place, the lunchroom, hundreds of people have packed in to welcome him back. And while the folks here--assembly-line workers, freight operators, shipping managers, call-center reps, quality inspectors--have eight-hour shifts ahead of them, their mood is celebratory. Rock music blares from the speaker system. Friends jostle and call out to one another from across the room. Posters splayed all over the plant's walls pronounce, TED IS COMING! On one that reads WELCOME BACK, TED in two-foot letters, workers have scribbled small notes to Waitt, yearbook style. "We're so glad to have you back. Rock on!" declares one message. "A great day for Gateway," another says. Still another reads: "The captain has come back to mind the ship and crew. Can't have the ship afloat without the captain."

As Waitt enters the room, a plant supervisor shouts over the crowd, "Ted is in the house!" The music shifts to Smash Mouth's "All Star." As the chorus throbs, "Hey, now, you're a rock star..." Waitt steps up onto a small, makeshift stage at the center of the cafeteria. The room is suddenly quiet--listening, waiting. Then, softly, almost shyly, in a low, throaty voice, Waitt says, "It's good to be home."

Here in this prairie town, where he was born and raised, met his wife, had his four kids, and built Gateway from nothing, Waitt is more than just the CEO. As one plant worker, shouting above the crowd, tells it: "He's our hero." Right now, a hero is what this company needs.

In January, one year after retiring as CEO of Gateway, Waitt stunned Wall Street, the press, and even his own employees by abruptly ousting his handpicked successor, Jeff Weitzen, firing almost all of Weitzen's top management team--including the CFO, CTO, and operations chief--and renaming himself CEO. Though the move was shocking, it's no secret that Gateway needed a fix. This company is in serious trouble. With the economy deteriorating and personal computer sales plunging, Gateway's net profits fell 26% last year, to $316 million. The company lost $94 million in the fourth quarter; in the first quarter of this year, estimates Steven Fortuna, Merrill Lynch's PC analyst, it lost another $13 million. (Results will be announced April 19.)

Waitt says he hopes Gateway will be profitable again by December. But that may be optimistic, considering that the company's archrival, Dell Computer, has launched a price war, dropping its PC prices by as much as 20%. On April 5, Dell's stock jumped 13% on news that its strategy is helping the Austin, Texas, company take market share from Gateway and other makers of personal computers. Meanwhile, Gateway's stock has plunged 80% from its 52-week high, trading recently at $15. (Waitt, with a 32% stake in the company, has lost more than $5 billion.)

But Gateway's problems began long before this winter. In his first extended interview since reclaiming the CEO's seat, Waitt talked candidly with FORTUNE about what went wrong over the past year, why he decided to take back Gateway, and how he plans to save it. Interviews with him and with dozens of current and former employees reveal how cultural clashes, strategic missteps, and a fundamental rift between Waitt's old Gateway and Weitzen's new one undermined nearly every aspect of the business--its morale, its operations, its competitive edge, and ultimately its ability to thrive.

Wearing his trademark black cowboy boots, with wisps of his hair tied in a tiny ponytail, Waitt takes a long, heavy drag from a freshly lit Camel Light. He looks remarkably relaxed for a guy with so many troubles. Having crammed his 6-foot-1 frame into my messy office at FORTUNE's Manhattan headquarters, Waitt, 38, is describing his first day back at Gateway. One of the first questions he got was "Does this mean we get to drink beer in the office again?" Laughing, he recalls, "I said, 'No! No beer in the office before five.'"

Only when talk turns to his year away from Gateway does the laid-back, fun-loving Waitt grow momentarily somber. Worth more than $7 billion when he left, Waitt spent the year trying to keep busy: He set up a charity to donate PCs to the needy, sat on the board of MP3.com, even toyed with the idea of starting an entertainment company. But nothing felt right. "I was a bit lost," he says, "like Dorothy in The Wizard of Oz."

Like Kansas for Dorothy, Gateway has always been home for Waitt. At 22, Waitt started Gateway 2000 (as it was then called) in a barn on his parents' cattle farm outside Sioux City. While hardly a computer whiz--the University of Iowa dropout had flunked high-school computer science--Waitt proved to be a gifted and intuitive salesman. His strategy was simple: By manufacturing and selling PCs direct to consumers, he'd keep overhead low and offer high-quality PCs at low prices. On that formula, Gateway grew over the next 15 years into the nation's fourth-largest computer maker, pulling in close to $10 billion a year. The company now has 20,000 employees, 15 call centers, and five manufacturing plants worldwide, from North Sioux to Ireland to Japan, plus 300 Gateway Country retail stores around the U.S.

Over the years Waitt fought to maintain the company's farmland roots. He kept headquarters in South Dakota and built a famously easygoing culture. Rock music blared on the manufacturing floor. Cow spots adorned the company's shipping boxes. He'd regularly visit call centers and assembly lines and was renowned for popping onto a sales floor, grabbing a headset, and taking customer calls. A dynamic and charismatic leader, Waitt was--and is--wildly popular with his troops. "He's a normal dude, an everyday guy you'd go out and have pizza with," explains Marlene Metcalf, a shipping operator in Salt Lake City. But as the company grew, Waitt reluctantly came to believe--with some prodding from Wall Street--that it needed more guidance than he could provide. What it needed was professional, big-company management. So in January 1998 he hired Weitzen, AT&T's business markets chief, to groom as Gateway's next CEO.

By all accounts, Waitt and Weitzen hit it off at first--as business partners and as friends. "Jeff and I had a very close relationship," recalls Waitt. (When contacted by FORTUNE for a response to Waitt's comments, Weitzen didn't call back.) They went to rock concerts together, played golf on weekends, and socialized frequently with each other's families. In business matters, "Jeff and Ted were reading each other's minds," says Brad Smart, a corporate recruiter who helped Waitt hire Weitzen.

They developed what seemed to be an ideal partnership. Weitzen, a serious-minded and disciplined strategist six years Waitt's senior, was the perfect foil to Waitt and his folksy, homespun style. He brought managerial experience and sophistication that Waitt lacked. He introduced Gateway to Six Sigma quality procedures. He improved the company's financial discipline, requiring every department to draft a budget, for example. He also helped Waitt map out a strategy--Beyond the Box--under which the company began bundling services such as Internet training and financing with its PCs. The partnership worked well: Under their leadership, from the beginning of 1998 to the end of 1999, sales grew 37%, net income nearly tripled, and the company's share price quadrupled.

Despite Waitt and Weitzen's rapport, tension was rife further down the management ranks. As Weitzen increasingly took control, he recruited a slew of new, high-level managers from such venerable companies as AT&T, GE, Nike, and PepsiCo. A rift emerged between them and Waitt's team. The old-timers felt the new guys were turning Gateway into a stodgy corporate bureaucracy, filled with memo writing, managerial procedures, and endless meetings. Bart Brown, who quit in December, says, "The week [before] I left Gateway, I was on conference calls for 26 hours." Waitt recently rehired Brown to run the consumer division. Mike "Hammer" Hammond, Gateway's first employee (recently reappointed operations chief), describes how decisions got made with the newcomers around: "You'd schedule an appointment, do some PowerPoints, do your presentation--if the meeting didn't get rescheduled--and you'd get asked a bunch of questions, and then you gotta come back with the answers."

For their part, the new management team viewed many of the old-timers as undereducated rubes unfit to run a major corporation. "These are guys that would show up to meetings barefoot; they'd drink beer in the office," sniffs one of Weitzen's recruits, who spoke on the condition of anonymity. "They had no training. They didn't even have college degrees." (Like Waitt, neither Hammond nor Brown graduated from college.) Tensions crystallized when the company moved its corporate headquarters from North Sioux to San Diego in 1998 to improve recruiting. A number of top old-timers, including Hammond and Brown, refused to leave South Dakota, in part because they knew Waitt soon wouldn't be in charge.

The real trouble, however, didn't begin until after Dec. 31, 1999, the day Waitt left the CEO post to become chairman of the board. New CEO Weitzen had none of Waitt's rapport with the troops. Quiet and contemplative, he spent much of his time behind closed doors mapping out strategy. He didn't "walk the halls," as one Gateway insider put it. "That other guy didn't come around much," says Brad Beavers, an assembly-line worker in North Sioux, who couldn't recall Weitzen's name. ("It wasn't mentioned much around here.")

Shortly after Waitt departed, Weitzen began freezing out many old-time Gateway managers. Hammond got demoted from operations chief to head of quality. Brown got pushed from running the consumer division into a series of lesser roles before he quit. Supply-chain chief Dave Russell left too. Many who stayed grew demoralized. "There was a point where I was asking myself, 'Ted's not here, the company doesn't seem to be going in the right direction--how much longer do I want to do this?'" recalls Shane Hartnett, Gateway's sixth employee, who runs the manufacturing floor in North Sioux.

Distanced from the troops, Weitzen set up a series of widely hated policies and procedures that dictated everything from what posters employees could put up in their cubicles to the exact time they could go to lunch. A customer-service rep recently complained that her lunch hour had been set at 9:30 A.M. A sales manager recalls the torture of two-hour daily conference calls that sales managers were required to attend. It was, some workers groused, the "AT&T-ification" of Gateway.

Many of these changes hurt more than just morale. They hurt business. For example, one policy put a time limit on customer-service calls; reps who spent more than 13 minutes talking to a customer didn't get their monthly bonuses. As a result, workers began doing just about anything to get customers off the phone: pretending the line wasn't working, hanging up, or often--at great expense--sending them new parts or computers. Not surprisingly, Gateway's customer satisfaction rates, once the best in the industry, fell below average. What's more, many customers stopped recommending Gateway to their friends and families; Gateway's referral business, once 50% of total sales, fell to about 30%.

At the same time, Weitzen was pushing the Beyond the Box strategy hard. On paper it made a lot of sense: Increase margins on PCs by selling add-on services with them. But beyond-the-box services became more important than the box itself. Under Weitzen, sales reps earned far higher commissions for add-on services than for PCs. So they became lax about selling no-frills computers. Reps would often hang up on customers who didn't want add-on services. Once, a rep told a customer who couldn't afford a pricier bundled PC: "You don't have the money? Call me when you get your tax return back." Concedes sales manager Lisa Echols: "We pretty much put all our values on the back burner. We just went around going after business the wrong way."

Meanwhile, Gateway's costs were skyrocketing. Taking over at a time when the economy was booming, Weitzen spent heavily as he extended the company's reach. He opened 100 new stores in the U.S. and six operations overseas. Meanwhile, such policies as the 13-minute limit were costing millions. SG&A expenses as a percentage of sales soared during 2000, climbing to 20% in the fourth quarter, up from 14% a year earlier. As costs rose, Gateway could no longer afford to match competitors' prices. By the end of the year some Gateway computers cost as much as 25% more than comparable Dell or Compaq machines.

As a result, sales suffered. Close rates (the percentage of customer calls that end in a sale) and store traffic tumbled. PC shipments--which historically had grown twice as fast as the industry average--grew just 9.6%, according to technology research firm IDC, nearly six percentage points behind the industry. In the fourth quarter, revenues sank 7%. Revenues for 2000, at $9.6 billion, inched up a mere 7%. That's dismal for a company that has grown, on average, over 20% a year for the past five years.

Ted Waitt watched all this from the sidelines. He was a hands-off chairman, renting office space for himself 15 minutes away from Gateway headquarters and rarely visiting the company. "I had to give Jeff his space, to let him be CEO," he says. Yet privately he was growing increasingly frustrated. "You could see he was upset about a lot of what was going on," says a high-level Gateway insider, who, citing friendships with both Waitt and Weitzen, asked not to be identified.

When asked about Weitzen's management changes, Waitt replies, "Was I upset about some of the longer-term Gateway people being pushed aside? It was something Jeff and I talked about." What's more, he strongly disagreed with Weitzen's plans to sell Gateway through outside distributors such as QVC and Office Max. "I thought it was damaging to the brand," he recalls. They clashed again when Weitzen rejected a TV ad featuring employee testimonials. Waitt had spent months working on the ad. "There was [a] philosophical difference: Jeff was executing differently than I would have executed as CEO," says Waitt.

Though both men continued to be cordial--and had lunch several times each month to talk business--by early fall their friendship had plainly cooled. The socializing and golf games stopped. When Waitt threw bashes for friends at his home in La Jolla, Calif., Weitzen was no longer invited.

Despite his frustrations, Waitt did not yet want to return to Gateway. "If the economy had kept flying along, I think they might have been able to fix some of the problems," he says. But of course the economy didn't keep flying along. For Gateway the crisis came during the long Thanksgiving weekend--normally the biggest sales weekend of the year--when the company notched sales that were a whopping 30% lower than those measured the previous Thanksgiving.

Immediately, Waitt knew Gateway was in serious trouble. Insiders say it was at this point that he began to show up at Gateway's offices more often and grill Weitzen about his handling of the crisis. Weitzen bristled at his presence. He was particularly upset to learn that Waitt was meeting with his managers alone and calling board members behind his back. The two never argued openly, but tension between them was building.

It all came to a head at Gateway's Jan. 17 board meeting. In a hostile and combative proceeding, insiders say, Waitt and the board interrogated Weitzen relentlessly. At one point, after Weitzen had finished talking about his plans to improve customer service, one board member snapped, "Why should we believe you?"

After the meeting Weitzen was furious. Stewing all weekend, he confronted Waitt the following Monday. High-level insiders say they argued for hours behind locked doors over how and by whom Gateway should be run. Waitt told Weitzen that he wanted him to stay on as CEO while Waitt took a more active role as chairman. For Weitzen, this arrangement--effectively a demotion--was unacceptable. Weitzen delivered an ultimatum: Back off or he was quitting.

Taking a day to think about it, Waitt decided he wasn't backing off. In a brief meeting on the morning of Wednesday, Jan. 24, he told Weitzen his decision. Shortly after, he called his old friend Bart Brown and said, "I'm putting the band back together."

By the following Monday, when Waitt announced his return, Weitzen was gone. (Weitzen, who collected a $5.6 million severance package, has no plans to look for another job.) That day Waitt also called in six of Weitzen's eight top managers, one by one, and told them to clear out. At the same time he rehired Brown, Russell, and Bob Burnett, another vet who'd quit, and reinstalled Hammond as operations chief. What's more, he persuaded them all to move to San Diego.

Since then Waitt has moved fast to try to get Gateway back on track. Within days of his return, he revoked 21 initiatives and 14 "stupid policies" Weitzen had in place. The deal with QVC is out. So are the time limits on customer-service calls. Beyond the Box has been replaced by Back to Basics. Explains Waitt: "We're in retrenchment mode." His plan is to ride out the economic storm by slashing costs and increasing sales volume. Backing off from noncore businesses, Waitt has sold $500 million of Gateway's $800 million consumer loan portfolio. And while the company will continue to offer beyond-the-box services, its focus is selling "one computer, one customer, at a time," says Waitt.

To that end he's revamped compensation, paying sales reps higher commissions for PCs once again. He's slashed Gateway's prices, matching Dell's in some cases. To trim costs, he's shut down 27 stores and is paring international operations. He's also cutting the number of components used to build Gateway PCs, reducing product variations from 23 million to 1,000. He's fired the company's ad agency and moved advertising in-house. He's even put the corporate jet up for sale (a Falcon 2000, $22.5 million, if anyone's interested). To motivate the troops, Waitt--in an internal contest dubbed Win Ted's Paycheck--is giving away his $10,000 biweekly salary to departments that best improve customer satisfaction or reduce costs. In Project Big Bucks, employees who suggest successful cost-cutting measures will win a percentage of the money saved at the end of the year.

Will all that be enough to rescue Gateway? "The jury's still out," says Marc Klee, lead portfolio manager of the John Hancock Technology Fund, which sold its stake in Gateway just before Waitt's return. After all, Waitt has been back on the job just three months. Still, his back-to-basics strategy "is absolutely on target," says Charlie Wolf, a PC analyst at Needham & Co., adding, "his employees love him, and when employees love their CEO, they work harder." Indeed, since Waitt's return,# close rates have jumped 20%, and customer satisfaction is up nine percentage points, to 76%, one point above the industry average.

But even for Waitt, saving Gateway will not be easy. "He's not God," observes Merrill's Fortuna. The problem here is bigger than low morale or strategic missteps. It's that consumers are simply not buying PCs like they used to. Even if the economy heals, the industry's glory days of fast growth with high margins are gone: More than half of U.S. households now own a computer, and thanks to plunging prices, average net margins on PCs have shrunk from a historic 25% to less than 5%.

Waitt knows that his presence is no cure-all. "I don't want people to think just because I'm back, I'm going to automatically solve all the problems and everything's going to be okay," he says.

Indeed, a recent visit to a sales floor in Salt Lake City showed how tough it is to close a sale these days, even for Waitt. Strapping on a headset, Waitt takes a customer call. "Welcome to Gateway. This is Ted, how can I help you?" he begins. He chats up the customer effortlessly, learning that her name is B--, she's a mother of four, and she needs a PC for her kids' homework. Looking on, one of the reps on the sales floor tells me, "He's really good--see how he gets all the details?" After 20 minutes Waitt has almost got a deal. At the last minute, though, B-- backs out. Worried about expenses, she says she has decided to put off buying a new PC.

FEEDBACK: kbrooker@fortunemail.com