Aug. 27 (Bloomberg) -- Acer Inc. will buy Gateway Inc. for $710 million to become the third-biggest personal computer maker in the world, overtaking Chinese rival Lenovo Group Ltd. by adding customers in Europe and the U.S.

Taiwan-based Acer said it will pay $1.90 a share for Gateway, 57 percent more than its closing price on Aug. 24. Acer also plans to exercise Gateway's right to buy Europe's Packard Bell NV, which Lenovo was in talks to acquire.

The takeover would double Acer's 5.2 percent market share in the U.S., and complete Gateway's plunge from the ranks of top independent PC makers. Its shares have dropped 99 percent since 1999, wiping out more than $25 billion in market value, as customers fled to Dell Inc. and Hewlett-Packard Co.

``It's eat or be eaten,'' said Christopher Wong, who helps manage $20 billion at Aberdeen Asset Management in Singapore. ``Acer realizes it needs a U.S. footprint to complete its global positioning.''

Gateway, based in Irvine, California, shares climbed 61 cents, or 50 percent, to $1.82 at 4 p.m. in New York Stock Exchange composite trading. The company's market value was less than $500 million, based on the closing price last week.

Acer Chairman J.T. Wang and President Gianfranco Lanci disclosed their plan to buy Packard Bell in a letter to employees today, a copy of which Bloomberg obtained. Beijing-based Lenovo, which has U.S. offices in Raleigh, North Carolina, said this month that it was in talks with Packard Bell. Lenovo is examining its options, spokesman Reid Walker said today in an e-mail.

Gateway's Rights

Gateway says it has right of first refusal on buying Wijchen, Netherlands-based Packard Bell because of a June 2006 agreement, when shareholder John Hui submitted a proposal to buy Gateway.

The company, founded by Ted Waitt in 1985 in an Iowa farmhouse, saw its stock triple alongside other technology companies' in 1999, only to drop 75 percent the next year. The computer maker cut at least 9,000 jobs and pulled out of Europe and Asia as PC sales slowed.

Gateway's sales have slipped for the past four quarters as Hewlett-Packard won more retail clients. Combined sales of Acer and Gateway would top $15 billion, with shipments of more than 20 million PCs, according to the companies. They expect to save about $150 million through the combination.

``Gateway couldn't survive on its own,'' Morningstar Inc. analyst Rick Hanna said in an interview today. ``It's just not big enough. It's just not global, and the competition is fierce.''

Acer's Results

Acer, the sixth-largest computer maker in the U.S., needs Gateway's brands to grow in that market, said Chicago-based Hanna. Gateway will reduce costs by using the Asian company's supply chain, Hanna said.

After expanding sales on its own for the past four to five years, Acer decided about 12 months ago it could ``speed up growth'' through acquisitions, Lanci said in an interview today.

Computers will continue to be sold under the Gateway name, he said. ``We want to run a multiple brand strategy in the U.S.,'' Lanci said. ``We're also going to expand the Gateway brand outside the U.S.''

Acer will fund the acquisition from its cash holdings, Wang said at a news briefing in Taipei. The company reported today that second-quarter net income fell 36 percent to NT$1.98 billion ($61 million) as Lenovo gained customers. Acer's stock fell 1.9 percent to NT$63.60 at the Taipei close, before the earnings and acquisition announcements.

Breakup Fee

Citigroup Global Markets Inc. advised Acer, while Goldman Sachs Group Inc. advised Gateway. Citigroup also advised Benq Corp., an offshoot of Acer, in 2005 on its takeover of Siemens AG's unprofitable mobile-phone unit. There is a $21.3 million breakup free if the deal doesn't go through, representing 3 percent of the total purchase price, Acer said.

``This is the most important international transaction we have undertaken'' since the purchase of Texas Instruments Inc.'s laptop business a decade ago, Acer executives wrote. ``There are many steps required to close the combination of Acer, Gateway and Packard Bell and we cannot yet give assurance that it will close.''

Gateway acquired rival EMachines in 2004 and had 1,645 employees as of April, according to its Web site.

Hewlett-Packard, which reclaimed the PC market lead from Dell last year, said Acer's takeover wouldn't affect its strategy.

``It's not going to change anything we do,'' Todd Bradley, Hewlett-Packard's PC chief, said in an interview today. ``It's always good for us when our competitors are trying to integrate things rather than sell.''

To contact the reporters on this story: Chinmei Sung in Taipei at csung4@bloomberg.net; Tim Culpan in Taipei at tculpan1@bloomberg.net

Last Updated: August 27, 2007 19:22 EDT