Acer's Gateway to the U.S. Market

If the deal is approved, the company will have computer brands for every price range. Dell and Hewlett-Packard, watch your backs

For a company on the ropes, PC maker Gateway (GTW) 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 (HPQ) and Dell (DELL) and is poised to expand in Europe, where China's Lenovo Group (LNVGY) has been eager for growth.

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 company (see, 3/21/07, "Gateway-Acer Does Not Compute"). 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.

Assuming Acer wins regulatory approval of the deal, the enlarged company would account for about $15 billion in global sales and make Acer the No. 3 PC manufacturer in the world. The deal will also stir up the retail PC market in ways that could threaten HP and Dell. Gateway and its eMachines brand accounted for a combined 18.9% of the U.S. retail market in the first six months of the year, according to researchers at NPD Group. Acer's 6.5% share brings the total to about 25%, still a fair distance behind HP's share of the U.S. retail market, which, including machines sold under the Compaq brand, is a beefy 41%.

Potential Threat

Despite Acer's relatively small share presence in the U.S—it sold only 888,000 units in the second quarter, compared with HP's 4.9 million—Acer has been growing at a healthy clip around the world. Acer's unit sales surged 55%, to 4.2 million, in the second quarter, according to market research firm IDC. The potential threat hasn't been lost on HP, which has filed two patent-infringement lawsuits in federal courts in Texas against Acer this year. "The suits suggest that HP is concerned about Acer's rapid growth. HP now has to worry about a bigger target with which to compete," says Gartner analyst Charles Smulders.

Acer's combination with Gateway could also step up pressure on Lenovo in Europe—by way of Packard-Bell. Although its glory days in the U.S. are long since past, its brand has remained alive in Europe as a unit of Japan's NEC (NIPNY). In connection with the bid by Acer, Gateway is exercising a right to purchase Packard-Bell from its current owner, serial entrepreneur and investor Lap-Shun "John" Hui, who in 2001 took the failing, low-end PC vendor eMachines private and with CEO Wayne Inouye turned it around. The pair sold it to Gateway in 2004 in a deal that was valued at $290 million and made Hui the second-largest Gateway shareholder behind founder Ted Waitt.

Gateway obtained that right through a complex series of transactions. According to people familiar with matter, Hui later sold his Gateway holdings and bought Packard-Bell himself—and in the process persuaded Gateway to let him out of a noncompete agreement that forbade him to acquire any competitors. In exchange for permission to break the noncompete, Gateway secured the right of first refusal to buy any of Hui's companies before he would be allowed to sell them to another competitor. Gateway's move kills a pending bid for Packard-Bell by China's Lenovo, which has been coveting an entrance into the European PC market. For Acer it's a defensive play, meant to keep Lenovo's European ambitions in check. The combination of Acer, Gateway, and Packard-Bell would rival Dell in the European notebook business, says analyst Roger Kay of Endpoint Technologies Associates.

Silver Lining for Dell?

As Gateway combines with Acer, it's also shedding its professional sales unit to a yet-unnamed third party. Insiders tell that the leading candidate is MPC Computers, an Idaho-based PC vendor that began its life in the mid-1990s as a unit of chipmaker Micron Technology (MU).

Even as the Acer-Gateway combination creates a more formidable competitor, it could create an unintended boon for Dell's retail sales strategy. Dell has announced plans to sell PCs through WalMart Stores (WMT) and may sell its machines through other retailers (see, 5/24/07, "Dude, You're Getting a Dell—at WalMart"). By cutting the number of PC makers supplying retailers with desktop machines from three to two, the deal could create an opening for Dell, says Steve Baker, retail PC analyst at NPD Group. "This might make retailers more receptive to what Dell has to say," he says. "Retailers never like having only two choices."

Complementary Brands

So what are the chances that this latest iteration of Gateway will roar back? One certainty is that Acer will attack the U.S. market with several brands. Acer President Gianfranco Lanci says all the brands currently in the portfolio will remain on the market. In addition to the eMachines and Gateway brands, Acer will bring its own brand and a high-end boutique brand of notebooks, Ferrari—the name licensed from the Italian sports-car maker that is a unit of Italy's Fiat. "We plan to keep all the brands and position them differently for different customers," he says.

The decision to maintain different brands while ensuring they don't overlap is one that has served HP well. "It's almost an ideal combination of brands," Kay says of those brought together by Acer-Gateway. "EMachines is low-cost desktops, Acer is low-cost notebooks. Then there's Gateway in midrange desktop and notebooks, and finally Ferrari. It's a more sensible deal than, say, HP and Compaq, with a lot less overlap."

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