Acer’s Gateway

Acer announced on Monday that it will acquire Gateway for $710 million. By most accounts the purchase will place Acer third in global PC market, behind Hewlett Packard and Dell. Of the deal Acer chairman J.T. Wang, said “The acquisition of Gateway and its strong brand immediately completes Acer’s global footprint, by strengthening our U.S. presence. This will be an excellent addition to Acer’s already strong positions in Europe and Asia. Upon acquiring Gateway, we will further solidify our position as No. 3 PC vendor globally.”

Those who agree with Mr. Wang say the move will create a larger company, placed firmly in third place worldwide, and grant it leverage in regards to pricing. Others see it as a dangerous step, one that it could easily backfire due to the current state of the PC market. Both sides have something to offer: While the acquisition will move Acer into third place it may not do so by much and it could bring with it new challenges for the company, on the other hand the possible risk involved may be justified as a requirement to remain competitive.

Lenovo, the company Acer is expected to replace as number three, was in a similar position two years ago when it purchased IBM’s laptop business for $1.75 billion. This similarity has served as the subject of comparison, “The deal carries hallmarks of earlier acquisitions such as Chinese rival Lenovo’s successful 2004 purchase of IBM’s PC business,” states the Financial Times.

Lenovo may have succeeded in leveraging their IBM acquisition, but has only begun to actualize this after two years. This, according to the Financial Times, could indicate a problem for Acer, “One concern is that U.S. PC sales could slow this year just as Acer steps up its push into that market.” Citing similarities in their and Gateway’s operations, Acer shirks off the comparison and says that Gateway will be easier for them to digest than IBM was for Lenovo. However, The Street points out that merely purchasing a higher ranked company may not be a ticket to the top, or even to third place. “Gateway, after all, is only No. 3 in America, which is a rock skip from No. 6. Besides, Gateway is troubled, and integrating a PC company ain’t what it used to be, even if the company does have experience.”

The fact also remains, as The Street alludes to, that for some time Gateway has been losing market share for its U.S. brands. According to MarketWatch, “despite remaining one of the top sellers of PCs in the U.S., Gateway’s sales have declined dramatically compared to the overall market and the performance of its competitors.” MarketWatch goes on to refer to technology research firm IDC, “Gateway’s second-quarter PC sales in the U.S. fell 7% from a year ago.” The InfoWorld blog references that slide, “the acquisition gives Acer a ‘foothold’ in the US market, say various analysts. Maybe so, but it’s one with cow manure beneath.”

Ratings reports have not all been kind either. In reporting on Fitch Ratings in regards to Acer Forbes says, “it has placed its ratings on the Taiwanese PC vendor Acer Inc on watch negative,” though the rating may be only temporary, “Fitch said the negative watch will be resolved upon clarification of the price Gateway is going to pay for Packard Bell, the possible restructuring costs on Acer’s acquisition of Gateway, and the proceeds from the sale of Gateway’s US-based professional business unit.” The Financial Times also remarks that despite Wang Jen-tang, Acer’s chairman and chief executive, appearing triumphant, “a 7 percent drop in Acer shares on Tuesday, the maximum daily movement on the Taiwan Stock Exchange, poured cold water on the enthusiasm.” To keep things in balance, there are rays of sunshine from the other side of the fence.

Blogging for eWeek Eric Lundquist states, “Acer has grown to be neck and neck with Lenovo to claim the No. 3 slot as the world’s largest vendor. The Gateway acquisition should put them into a few percentage points ahead of Lenovo. By gaining the Gateway name . . . Acer gets to take a strong run at the U.S. market at a time when the market is in flux.” Lundquist also believes the acquisition will put pressure on Dell, “Acer acquiring Gateway means that Dell has to look over both shoulders at the same time,” over one shoulder at HP which capitalized on Dell’s past mistakes and now over the other at Acer. BusinessWeek goes along with that, “For a company on the ropes, PC maker Gateway will probably go a long way in helping its new owner take a swing at bigger rivals Hewlett-Packard, Dell, and Lenovo. By snapping up Gateway for $710 million, Taiwanese PC maker Acer gains a bigger toehold in the U.S. market dominated by HP and Dell and is poised to expand in Europe, where China’s Lenovo Group has been eager for growth.”

Perhaps the most notable view is that while it may not be a winning ticket, the Gateway acquisition may be vital for Acer’s survival. The Wall Street Journal notes, “The banding together of Taiwan-based personal-computer maker Acer Inc. and Gateway Inc. of the U.S. underlines how crucial scale is in the consolidating global personal-computer market, where margins are thin and competition is increasing.” The scale on which Acer will now operate will allow it to purchase components at lower prices which amount to savings to be passed along. According to the Journal executives said, “The combined company would have had total revenue of more than $15 billion for 2006 and expects to ship about 25 million PCs this year.”
In any case, the battle is still for a number three position, and even that may be only by a few percentage points. The acquisition may make for a combined 25 percent of the U.S. retail market (roughly 18 percent for Gateway and 6.5 for Acer), but that is still a far cry from HP’s 41 percent.

A more complete version of this post, including links to market research, can be found at the website of Analyst Views Weekly.

More information on this topic can be found in the Software section of Northern Light’s Software, Computers, & Services Market Intelligence Center.

And in the following articles:

Hysteria over Acer-Gateway
TheStreet.com, August 29, 2007
If anything, the coverage of this merger is a departure, because we usually get instant consensus marked by so much agreement across different media outlets that it comes at investors like thick, choking smoke. Here, strangely, there are different interpretations by the wagonload.

Acer Looks to Gateway for a Brighter Future
Financial Times, August 28, 2007
Wang Jen-tang, Acer’s chairman and chief executive, appeared triumphant this week over his company’s deal to acquire Gateway, the US personal computer maker. But a 7 percent drop in Acer shares on Tuesday, the maximum daily movement on the Taiwan Stock Exchange, poured cold water on the enthusiasm.

Acer’s Gateway to the U.S. Market
BusinessWeek, August 28, 2007
Speculation that Acer would make a play for Gateway—and later concern that it wouldn’t—fueled the share-price swings that are helping Acer nab its target on the cheap. Gateway’s stock hit a 52-week high of $2.44 in March after Acer Chief Executive J. T. Wang said he was interested in buying a PC. The shares languished, falling as low as $1.13 on Aug. 7, when it appeared that a deal wasn’t in the offing, and Gateway showed little evidence of turnaround from years of slumping sales. Acer agreed to pay $1.90 a share, 57% higher than Gateway’s Aug. 24 closing price of $1.21.

Acer, Lenovo Deals Just the Beginning?
eWeek, August 28, 2007
A rash of acquisitions and near-acquisitions by Asian PC manufacturers may signify that companies dedicated to design and development of low-end PCs have greater ambitions and are interested in moving up the food chain. In the past week, Taiwanese PC manufacturer Acer purchased U.S. PC manufacturer Gateway, while Chinese computer maker Lenovo is strongly rumored to be interested in purchasing hard disk drive manufacturer Seagate Technology, also based in the United States.

Taiwan’s Acer to Buy Gateway for $710 Million
MarketWatch, August 27, 2007
Gateway Inc., once one of the highest fliers of the personal-computer industry but in recent years reduced to a niche player, said Monday it would be acquired by Taiwanese PC giant Acer Inc. for $710 million. Under terms of the deal, Acer will pay $1.90 for each share of Irvine, Calif.-based Gateway, the one-time Wall Street star that’s struggled mightily since the end of a high-tech boom in 2001.

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