Acer Chief Promises No Gateway Layoffs
For two months, Acer Chairman and Chief Executive Officer J.T. Wang has been trying to win over skeptics who have been questioning the wisdom of the Taiwanese computer company's acquisition of Gateway. In late August, Wang and his No. 2, Acer President Gianfranco Lanci, sealed a $710 million deal for the American PC maker. The acquisition, Acer executives argued, would help win customers in the U.S., where Acer traditionally has been weak. Moreover, the combination of Acer, Gateway, and Packard Bell (the European PC maker that was also part of the deal) would leapfrog the company ahead of Lenovo (SEHK) to become the No. 3 computer brand worldwide (BusinessWeek.com, 8/27/07), behind only Hewlett-Packard (HPQ) and Dell (DELL).
But investors were not impressed, sending Acer's Taipei-traded shares plummeting 12% after news of the deal broke. Some worried that Wang and Lanci had overpaid for Gateway, a company that had definitely seen better days. Once one of the top brands in the U.S., Gateway had fallen to No. 5 in the American market.
Today, Wang is getting more of a hearing. On Oct. 26, he told reporters in Taipei that the company shipped 5.44 million computers in the third-quarter, a 59% leap from the same period in 2006. Acer's quarterly profit jumped 58%, to $90 million, on sales of $3.76 billion. Acer's stock has recovered from its August swoon and on Oct. 29 hit a 52-week high ,at 77 Taiwan dollars, up from 55 in the aftermath of the Gateway announcement. In an interview before the earnings announcement, Wang spoke with Bruce Einhorn, BusinessWeek's Hong Kong bureau chief, about the logic of the Gateway deal and why the company's American employees should not fear a Taiwanese takeover.
Many people complained after you announced the Gateway acquisition that Acer had paid too much for what is, at best, a second-tier brand in the U.S. What do you say to critics of the Gateway deal?
The price is high, the price is low, that depends on how much you can make from the acquisition. In the coming three to five years, if you can make more than the amount you paid, that justifies the transaction. We have high confidence to capitalize on the synergies. There are over $150 million per year in synergies, easily, mainly from cost savings, through bigger quantity procurement. I am confident that another 20% will be secured. So this is a rational decision, a well-calculated strategic move.
Still, Gateway has fallen so much from its heyday. Is this another example of an Asian company overpaying to acquire a tired old Western brand?
This deal is an extension of Acer's existing competitive advantage. We do very little corporate account business; we are mainly strong in the consumer and SME [small and midsize enterprises] channels. Gateway and Packard Bell are mainly in the consumer channels.
Acer's had very little luck in the U.S. The company pulled back from the market in the late 1990s and hasn't made much of an impact. So why should the acquisition of an also-ran like Gateway make a difference?
We have been in the U.S, having more aggressively re-entered [the market] for three to four years. We understand what's going on in the market, in the channel, in the user requirements. We can draw a clear picture now. We understand how to combine the puzzle, to become a more powerful business operation. Realistically, Acer still has low awareness in the U.S. in brand positioning. That's the reality. That makes our U.S. business model very difficult.
Gateway has good awareness, good positioning, but people consider this a company with no future. They have a team of good people who have been hanging on for many years, even with no financial support or resources. So we said there is something valuable inside.
Are you going to phase out the Gateway brand, the way Lenovo is gradually getting rid of the IBM (IBM) brand following its 2005 takeover of the IBM PC division?
We will try to keep multiple brands [in addition to] the Acer brand. It's a critical decision. We are engaged in consulting and going through more in-depth evaluation. We will make a decision by the end of this year. You need more than one brand to arrange the marketing and sales.
And how will keeping the Gateway brand help?
The Gateway brand can sell for $47 more than Acer, for the same spec notebook. That's about 5% more. We made 2% to 3% [net profits] everywhere besides the U.S. in the past two to three years, while in the U.S., it's been 0% to 0.5%. This year we may make 1% net profit, on $3 billion revenue. We have already done all the possible efforts to manage costs and continually grow the business. But when we grow to $3 billion and we can't make 2%, 3% profit, we think that we have to do something. One is to put in a lot of money to build your brand awareness. When we look at the combination of Acer and Gateway, the synergy on the back end, we feel it's a better choice.
Is laying off U.S.-based workers at Gateway one way to achieve those synergies?
People in Gateway started to think how many employees will be laid off. That's not a priority. We want to keep the business. The synergies calculated don't include laying off people. They're mainly from back-end synergies, especially for procurement of key components and possibly synergies from logistics and services. The priority is to create synergy and maintain the business. We don't want to destroy the business or scale down the business. People at Gateway should look at Acer as supporting their strength to make the business turn around.
Gateway helps you in the U.S., where Acer is weak. But Packard Bell's strength is in Europe, where Acer already is in a good position. Why is that company part of the deal?
It reinforces our leader position in Europe.
What about speculation that you were doing it to block Lenovo, which was interested in Packard Bell?
That was part of the consideration, one of several key considerations. With one stone, we killed three or four birds. It's a good return on investment.
And where do things stand with the two deals?
We announced on Aug. 27, and we completed the Gateway merger on Oct. 15. We are going through regulatory approval of the Packard Bell deal. So far, it's under process, and we expect to conclude by the end of this year.
What comes next? Acer is still weak in China, and there are rumors floating around that Acer is one of several outsiders looking to acquire a local Chinese PC company.
Of course, the next [priority] will be China. Management attention is going to be on China. I don't rule out the possibility to have some acquisition. But now we have to focus on streamlining the businesses of Gateway and Packard Bell. We are not seriously engaged in discussion with any company. We are not in a hurry. In the next four to five months, Taiwan is going to have a presidential election, and we have to be careful. We don't know what will happen in the election. Maybe this period of time it is not appropriate for us to do anything. Acer is so visible in Taiwan, we have to handle that very carefully. No matter how much we emphasize that we are a global company, China says you are a Taiwanese company.
Speaking of China, as the head of a company listed in Taiwan, what do you think about the way markets in Shanghai and Hong Kong have been heading upward so sharply? Acer's stock price trades at multiples far lower than counterparts across the Taiwan Strait. Should you be thinking about a shift?
Some banks did mention this kind of alternative to us. But so far it's not on the radar. Recently Citi (C), our adviser in the Gateway case, gave me a report and said, "Hey, J.T., your stock price in Taiwan is at 15-20 p-e ratio, and Lenovo gets 40-45. Your listing is in Taiwan, and your stock price is at a disadvantage."
So, do you have any plans somewhere else?
I have to watch. Has it become a permanent result or a short-term phenomenon?