THE PRICE OF FREEDOM

By Daniel Kadlec

Inflation may be at a historic low, but the price of independence is climbing. What better evidence than the ponytailed Ted Waitt, founder and 46% owner of South Dakota's mail-order computer retailer Gateway 2000? Waitt, 34, the son of a fourth-generation cattle broker, has just walked away from a monumental deal with Compaq Computer that would have left him with a personal fortune of more than $3 billion. No, he did not get kicked in the head by a cow.

There have been rumors for weeks that growth-obsessed Compaq was stalking Gateway. Compaq CEO Eckhard Pfeiffer has said he wants to more than double his company's revenues, to $40 billion, by the end of the decade. Compaq, an outstanding performer in a difficult-to-manage industry, amassed $4 billion in cash at the end of 1996 so Pfeiffer could go shopping. Earlier this year he talked with Micron Technology about buying its mail-order computer company, Micron Electronics. No sale.

But last month Pfeiffer figured he had reeled in one of the computer industry's prize catches in Gateway, the iconoclastic Sioux City outfit whose packaging bears the black-and-white markings of a cow's hide but whose burgeoning revenues are 100% filet mignon. Few know or even suspect just how close Pfeiffer came. The contracts were ready, and Waitt had the proverbial pen in hand before he evidently had a cathartic flash and rejected a nearly $7 billion takeover by Compaq. Gateway's current market value is $4.8 billion.

Waitt, a college dropout who founded Gateway in his father's Iowa farmhouse, put a stop to the deal only days, possibly hours, before it was to be announced. The exact details aren't clear, but at one point Pfeiffer and Waitt met at Waitt's sprawling estate on the Missouri River. Gateway's public relations firm, New York City-based Hill & Knowlton, had begun preparing a press release. Waitt had even dispatched a courier to foreign offices to deliver the news to key executives. But ultimately Waitt couldn't sign on the dotted line. The deal appears to have fallen apart when Compaq started to project some corporate muscle, as in, "You work for us now." Waitt bristled at his executives' being treated as subordinates, not equals. Both Compaq and Gateway declined to comment. But a source close to Waitt says, "Anyone who really knows Ted Waitt knows that there are things more important to him than money. Two of those things are Gateway and its people." And ultimately the $3 billion windfall for Waitt may not have been much of an incentive anyway: though he needed to borrow $10,000 from his grandmother to start Gateway in 1985, his 36 million shares in the company are worth more than $2 billion. What's an extra billion for a man who loves running the company he founded and has nurtured from such humble roots?

Gateway is the No. 2 direct marketer of personal computers, behind powerhouse Dell Computer ($7.8 billion in sales last year). Gateway's 500 salespeople work the phone banks 16 hours a day, filling PC orders for individuals and small businesses and helping them troubleshoot their equipment. Since selling initial shares to the public in 1993, Gateway has seen annual revenues triple, to more than $5 billion.

Compaq, which sells to individuals and businesses mainly through traditional computer retailers and sales offices, is on a similar growth curve. Compaq had 1996 revenues of $18.2 billion, more than triple its annual revenues just four years earlier. The industry's next wave of growth is being propelled by falling prices that put the cost of a machine closer to that of a household appliance. Houston-based Compaq introduced its Presario 2100 for $999 in February. Others have low-priced PCs too. Now the industry is bracing for a quantum leap in demand as people who previously couldn't afford a computer rush to buy one on the notion that one day a PC will be as indispensable as a car or TV. Compaq wanted Gateway so it could speedily add capacity to meet the new demand. But Waitt's vision of the future told him the Compaq offer wasn't worth it--not to a billionaire free spirit who values his independence.

TIME's Daniel Kadlec can be reached at kadlec@time.com