Acer's Gateway Purchase

Deal for $710 Million
Adds to Heft in U.S.;
Threat to H-P, Dell
By JASON DEAN and LORETTA CHAO
August 27, 2007 2:06 p.m.

BEIJING -- Acer Inc.'s acquisition of Gateway Inc. for $710 million highlights the intensifying consolidation in the personal-computer business and strengthens an already fast-growing competitor against industry leaders Hewlett-Packard Co. and Dell Inc. in their home market.

The deal, announced Monday, will put Taiwan-based Acer firmly in the No. 3 spot in global PC market share by unit shipments, supplanting Lenovo Group Ltd., which itself vaulted into the global top tier two years ago by purchasing the PC operations of International Business Machines Corp. The Gateway acquisition marks a major though potentially risky step for Acer, a company that once manufactured PCs for big-name Western brands and is now buying one.

Under terms of the agreement, Acer will launch a cash tender offer for all outstanding shares of Gateway, Irvine, California, for $1.90 a share, a 57% premium to the closing price of Gateway's shares on the New York Stock Exchange Friday. The companies said the deal has been approved unanimously by the boards of both companies and is expected to close by December.
PC PLAYERS SCORECARD

The combination of Acer, Gateway and Packard Bell would form a company with about 10% of the U.S. market.
Global PC Shipments U.S. Market Share Annual Revenue (in billions)
Dell 39.1 million 27.3% $57.1
H-P 38.8 million 23.6% $91.66
Lenovo 16.6 million 3.9% $14.6
Acer 13.6 million 4.8% $11.32
Gateway 5.0 million 6.3% $3.98
Packard Bell 841,235 NA NA
Source: IDC, WSJ.com research
Annual 2006 world-wide shipments. U.S. market share as of June 2007. Lenovo revenue for fiscal year ended March 31, 2007; H-P revenue for fiscal year ended Oct. 31, 2006; Dell revenue for fiscal year ended Feb. 2, 2007

The union with Gateway gives Acer needed heft in an industry increasingly dominated by its top few players. The combined company would have had total revenue of more than $15 billion for 2006 and expects to ship about 25 million PCs this year, executives said. By selling itself, Gateway, long one of the best-known PC names in the U.S., admits defeat in its effort to battle larger U.S. rivals -- though Acer executives said they will continue to use the Gateway brand.

"Scale has never been more important" in the PC industry, Acer Chairman J.T. Wang said on a conference call. "And this transaction provides [us] the scale to compete in today's global market."

Owning Gateway will substantially increase Acer's foothold in the U.S., a market long dominated by Dell and H-P but where Acer has been making headway selling its laptop PCs through big retail chains such as Best Buy Co. If the deal closes, Acer will become the No. 3 U.S. PC company by unit shipments, far larger than Apple Inc., which would become the No. 4 U.S. player. Acer and Gateway together held about a 10.8% share of the U.S. PC market in the second quarter, nearly half the 23.6% share of second-ranked H-P, according to preliminary estimates by market-research firm IDC. Dell's share was 28.4%.

The tie-up could involve a double blow to Lenovo, one of China's best-known companies, which has been battling with Acer for the global market's No. 3 spot all year. Lenovo disclosed earlier this month that it was in talks to buy a stake in Packard Bell BV, a PC maker based in the Netherlands. That deal was aimed at giving Lenovo a leg up in the European consumer market, where Acer is especially strong.

But in a separate statement issued just before Monday's merger announcement, Gateway appeared to throw cold water on those talks, saying that it intends to exercise a "right of first refusal" to acquire all the shares of Packard Bell's parent company. Gateway said it acquired that right in June 2006 from John Hui, the Chinese-American businessman who owns Packard Bell and who sold eMachines to Gateway in 2004. Gateway said it had received a notice from Mr. Hui offering to sell all the shares of Packard Bell's parent company to Gateway at a price "based on an offer received by Mr. Hui from a third party." It is unclear what that price would be.

A Lenovo representative says it remains interested in acquiring Packard Bell. A representative for Packard Bell didn't immediately respond to requests for comment.

The deal occurs at a time of major change in the U.S. PC market, as growth in business purchases of desktop PCs has slowed and consumer purchases, largely of laptops, have become more important. That shift is giving retailers much more clout in the industry because many consumers prefer to see and feel products before they buy them. Acer's focus on retail sales has helped it grow rapidly in the U.S. in recent years, a trend analysts said the Gateway acquisition could accelerate.

"I think this changes the global market," said Tracy Tsai, a Taipei-based analyst at research firm Gartner Inc. Other top PC vendors have already "noticed that Acer is moving quickly up the ranks, and it's forcing them to be more aggressive in holding on to their market share."

Analysts say Gateway had been looking for a buyer in the face of declining U.S. sales. The company has faced stiff competition in the past year from a re-energized H-P and pricing battles that have reduced margins across the industry. "Gateway was kind of a sinking ship," says Doug Bell, an analyst with IDC in Framingham, Massachusetts.

The Gateway union will bring new challenges to Acer, which has engineered a remarkable turnaround since hiving off its contract-manufacturing operations in 2000 to focus on its own brand. It will have to manage three brands -- eMachines in addition to its own name and Gateway, which could dramatically increase the complexity of its operations. Retailers may want to condense the shelf space they allot to the three brands, for example, when they are all owned by one company.

Acer's Mr. Wang acknowledged that the multibrand move is a "major change in corporate strategy" but said the strategy would be a strength, enabling the company to better target different segments of the consumer market.

Acer has been plotting an acquisition for about a year. Mr. Wang, the chairman, first disclosed the company's intention to do a deal in a March interview with The Wall Street Journal, although at the time he didn't disclose any possible targets. Mr. Wang said Monday that Acer and Gateway have been in contact for some time but that serious discussions about the merger began about six weeks ago.

Executives said they expect the union to save the combined company about $150 million next year, by giving it better purchasing power for components and by cost cuts through combining parts of overlapping operations such as customer services.

Gateway has been trying to sell its unit that sells PCs to businesses. Executives said that effort will continue and that its success or failure won't affect whether the Acer deal happens. Separately Monday, Acer reported a decline in net profit for the most recent quarter but said sales and operating profit grew sharply. Acer said its consolidated revenue, including subsidiaries, rose 28% to 93.52 billion New Taiwan dollars (US$2.84 billion) in the three months through June, from NT$72.86 billion in the same period a year ago. Net profit fell 36% to NT$1.98 billion from NT$3.08 billion.

Acer didn't explain the decline in earnings, but its profit figures are frequently influenced by disposals of its considerable holdings in affiliates. For that reason, Acer's operating profit often provides a better measure to compare performance of its core business. In the latest quarter, operating profit rose 29% to NT$1.96 billion from NT$1.52 billion.

Acer had NT$44.69 billion in cash and cash equivalents on its balance sheet at the end of 2006.