Acer buys into U.S. PC market

Gateway purchase makes Taiwan firm No. 3

August 28, 2007|By Cox News Service

SAN DIEGO -- Acer Inc. has long tried to get a foothold in the United States, but giants like Dell Inc. and Hewlett Packard Co. have constantly tripped up the Taiwanese computer maker.

Yesterday, Acer opened a back door into the market, buying Gateway Inc. to instantly become the No. 3 PC seller behind HP and Dell, both in the United States and internationally.

Acer's $710 million purchase of Irvine, Calif.-based Gateway marks a final chapter for a pioneer in the U.S. personal computer business whose once iconic cow-spotted boxes and "Gateway Country Stores" harkened back to its all-American roots on an Iowa farm.

Founded in 1985 by colorful entrepreneur Ted Waitt, Gateway was once a leader in the PC business. But in recent years, it has struggled mightily, losing market share and stature and going through five CEOs in six years.

Acer's takeover calls for it to pay $1.90 a share for all of Gateway's outstanding stock -- a far cry from the $80 range in which the stock traded in the late 1990s.

As part of the deal, Acer will get not only the Gateway brand, but also eMachines, which Gateway bought in 2004, and Packard Bell, which was once big in the United States and now is a major vendor in Europe. In connection with yesterday's deal, Gateway announced it was exercising its right of first refusal to buy Packard Bell. Both deals are expected to close by the end of the year.

According to technology researcher Gartner Inc., Acer will move from the No. 5 spot among U.S. personal computer sellers to take the No. 3 spot from Apple Inc., which has been gaining market share on the heels of its highly successful iPods and after switching to industry standard PC microprocessors from Intel Corp.

"Gateway's strong U.S. presence and household brand will complete our global footprint and add scale," Acer Chairman J.T. Wang said in a conference call with reporters and analysts. "Scale," he later added, "has never been more important in this industry."

While the deal seemingly cements the top of the lineup for the computer industry, longtime industry analyst Roger Kay suggested that more consolidation may be in the works, especially involving smaller players.

"This is sort of the mid-history consolidation," Kay said. "There's going to be more."

Acer's takeover of Gateway is another indication of Asia's tightening grip on the worldwide PC market.

Yesterday's move comes two years after Chinese computer maker Lenovo shocked the industry by buying International Business Machine Corp.'s PC business for $1.75 billion.

"Even the [PC makers] who aren't Asian are using Asian factories to build their parts," said J.P. Gownder, an analyst with technology consulting firm Forrester Research. "But [Asian companies] aren't just making parts for computers and putting someone else's labels on them any more. ... They're moving up in the value chain."

In getting Packard Bell along with Gateway, Acer scored a major tactical coup against its Chinese competitor. Just a few weeks ago, Lenovo said it was planning to buy Packard Bell.

Acer's purchase of Gateway is poised to reshape the PC industry in other ways, too.

In announcing the move early yesterday, Acer executives repeatedly noted they plan to keep selling PCs under all the brands -- Acer, Gateway, eMachines and Packard Bell -- which separately appeal to a wide variety of buyers across all price ranges, from high-end computer enthusiasts to budget-minded consumers.

Lenovo pursued a similar strategy in keeping IBM's well-known "ThinkPad" brand. Palo Alto, Calif.-based Hewlett-Packard did the same thing when it kept the Compaq brand after its merger with that company five years ago. And Dell, based in Round Rock, Texas, kept the Alienware brand when it acquired that boutique PC maker last year.

Having multiple brands "is extremely important in the PC industry right now, and will be even more important in the future," said Acer President Gianfranco Lanci.

But analyst Gownder said Acer wanted the Gateway and eMachines brands because mainly, "their problem has been that they haven't been able to establish a very large mass-market brand" in the United States.

To do that, he said, "you really need a massive, very expensive campaign to get your name known."

Or, Gownder added, you can buy your way into a market, as Acer is doing with Gateway.

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