Acer Acquiring Gateway for $710 Million

Updated: Acer is vying to become one of the world's largest PC vendors.

In a move that looks to create one of the worlds largest PC vendors, Acer announced Aug. 27 that it would acquire Gateway for $710 million, according to a joint statement from both companies.

The acquisition, for about $1.90 a share, aims to create the worlds third-largest PC vendor. The combined revenue of the two companies is expected to top more than $15 billion and their combined shipments will equal out to about 20 million desktops and laptops annually.

The deal is expected to close in December.

Although Gateway, which is based in Irvine, Calif., continues to rank among the top five PC vendors in the United States, the company has found itself steadily losing market share to high-powered competitors, such as Hewlett-Packard and Dell. According to reports released July 18 by IDC and Gartner, Gateway lost about 7 percent of its market share between the second quarter of 2006 and the second quarter of 2007.

As of the second quarter of this year, Gateways PC shipments account for only about 5 percent of all U.S. PC shipments. In the past several years, Gateway has tried to reinvent the image it had created during the 1990s, when it focused on selling desktops direct to consumers. Now, Gateway focuses on PCs and servers for SMBs (small and midsize businesses) and offers a range of products, including laptops and tablet PCs. The company still does offer a range of consumer products as well.

/zimages/1/28571.gifClick here to read more about Gateway and its attempt to get back to direct sales.

Acer, on the other hand, has been surging in the last several quarters thanks to its line of inexpensive laptops and its focus on the consumer market. The same Gartner and IDC report that found Gateway losing share in the U.S. market also found that Acer had gained 163 percent in the second quarter of this year.

In the worldwide market, Acer—headquartered in Taiwan—ranked in the top five and held about 7 percent market share, according to IDC and Gartner. Now, with the addition of Gateway, Acer has maneuvered itself in a position to challenge Lenovo, which purchased IBMs PC division in 2005, as the third-ranking PC vendor worldwide.

J.P. Gownder, a principal analyst with Forrester Research, said the Gateway acquisition represents a huge step forward for Acer, even though the Gateway brand is not as popular or important as it was just seven or eight years ago.

"This is a pretty big deal for Acer and they have tried to really expand their presence with a lot of slick designs and they have also done a lot of interesting co-branding stuff, like what they did with Ferrari," Grownder said. "Acer has been on the ball lately and Gateway is still an important brand, although its not near where it was about seven years ago. People still know the name and its sold at Best Buy."

More important than just one company buying another, this latest move shows that many of the Asian ODMs (original design manufacturers), such as Acer and Asus, are starting to become PC powerhouses in their own right.

The one drawback to the deal for Acer, said, Grownder, is that the Gateway line of PCs does not fit into the companys designs to produce high-end laptops that offer the opportunity of better margins.

Although Lenovo has a good international presence thanks to its sales in China, the company does not rank within the top five in the U.S. market even with its popular line of enterprise ThinkPad laptops and tablets and its ThinkCenter desktops.

The move by Acer to acquire Gateway will likely now end or at least complicate Lenovos desire to purchase Packard Bell, one of the bigger PC vendors in Europe, in order to expand its presence in a market where it is weakest. In its statement, Gateway executives said they will pursue the option to purchase all the shares of PB Holding Company, the parent company of Packard Bell, which is controlled by Lap Shun (John) Hui.

/zimages/1/28571.gifClick here to read more about Lenovos latest investments in Mexico and India.

A spokesman for Lenovo confirmed that the company remains interested in acquiring Packard Bell, which is based in France.

"We remain interested in Packard Bell and are reviewing our options," said Ray Gorman, a spokesman for Lenovo. "We will have further comment when appropriate."

In addition to Lenovo, the Gateway acquisition allows Acer to challenge Dell within the consumer market. That part of the market has been a weak spot for Dell and Acer, as well as other PC makers such as Apple, has proved adept at offering laptops that are more in tune with what a certain segment of the consumer market is looking to buy.

How much the enterprise is playing into the Acer acquisition is unclear. The company has made its reputation as a supplier of laptops to a mostly consumer base and its joint statement noted that it is in negotiations to sell Gateways professional line to a third party.

Richard Shim, an analyst with IDC, said Gateways enterprise business could go either way. In one sense, Acer, with its emphasis on consumer laptops, does not need an enterprise division within the company. In that scenario, Acer bought Gateway to help it with distribution and to move more products through the retail space.

On the other hand, Gateways enterprise business—which focused on government, education and some business verticals with PCs, server and storage products—could prove of value if the consumer market begins to slow.

"The commercial business adds a level of scale and you also have another level where Acer now has access to larger accounts in education and government," Shim said. "Its a steady business if you need it, especially if the consumer market starts to cool."

The two companies are expected to save some money by combining back-end operations and also by using the new companys clout to better leverage the supply chain in order to buy components at a much cheaper rate.

Editors Note: This story was updated to include information and comments from an analyst.

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