Taiwan's Acer to buy Gateway, foils Lenovo

TAIPEI/SHANGHAI: Taiwan's Acer will buy Gateway for $710 million, creating the world's No. 3 PC maker and doubling its US presence while dealing a blow to arch-foe Lenovo's efforts to grow in Europe.

Lenovo's plans were set back when Gateway declared on Monday that it would exercise its right to take a first attempt at buying the parent of European-focused PC maker Packard Bell.

The Chinese PC giant has said it was in talks to buy Paris-based Packard Bell, hoping to expand its presence in a European consumer market where it is relatively weak.

Packard Bell and Lenovo executives declined to comment.

Acer said it would pay $1.90 per Gateway share, representing a premium of 57 percent over Gateway's last closing price. The U.S. firm's stock rose 59 cents, or 49 percent, in pre-market trading on Monday to $1.80, from a Friday close of $1.21.

Acer said the merger would create a company with more than $15 billion in sales and 20 million PCs shipped per year, adding it would keep the Gateway brand in the United States.

On a worldwide basis, the tie-up would help Acer - Taiwan's most recognised global brand - displace Lenovo.

"This will now bring Lenovo and Acer into head-to-head competition globally," said IDC analyst Kitty Fok. "And if Acer manages to acquire both Gateway and Packard Bell, this will help it maintain third place in the world once it reaches it."

Lenovo - one of a handful of Chinese firms trying to forge a global brand by investing abroad -- dropped to global fourth place in the first three months of 2007 but has now reclaimed the No. 3 slot from Acer in a closely fought battle.

But the latest developments may mean Lenovo will have to think of other ways to break deeper into the European market, analysts added.

"Lenovo will have to go back to what they were doing earlier, which is build their own distribution channels. It's taking away their easy entry into the European market," said Jenny Lai, a Taiwan-based analyst with CLSA.

Lenovo bought IBM's ailing PC arm for US$1.25 billion in 2005, but has been saddled with expenses arising from lay-offs and corporate streamlining.

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Acer shares closed down 1.85 percent at T$63.60 before the announcement.

The deal would help Acer immediately double its U.S. market share, combining its own 5.2 percent of the market with Gateway's 5.6 percent, according to second-quarter market data from IDC.

"This acquisition of Gateway and its strong brand immediately completes Acer's global footprint by strengthening our U.S. presence," Acer Chairman J.T. Wang said in a statement.

"This will be an excellent addition to Acer's already strong positions in Europe and Asia. Upon acquiring Gateway, we will further solidify our position as No. 3 PC vendor globally."

The deal is expected to be completed by December and the merged company would still be a distant third in the United States, behind No. 2 Hewlett-Packard at 23.6 percent and market leader Dell at 28.4 percent, according to IDC.

"Acer's fumbled around a bit in the U.S., so this will definitely help in that regard," said IDC analyst Bryan Ma.

A merged Acer and Gateway would have sold about 18.6 million PCs worldwide last year, or about 8 percent of global sales, compared to Dell's 39.1 million units, Hewlett-Packard's 38.8 million and Lenovo's 16.6 million, according to IDC.

Packard Bell is a relatively small player, No.18 worldwide, with under 1 million units shipped last year.

Acer said it expected to achieve at least $150 million in pre-tax synergies following the merger, which should be accretive to its earnings per share in 2008 without synergies.

But execution will be key -- a lesson that Lenovo learned when it stumbled badly after forecasting similar cost savings following its 2005 acquisition of IBM's PC business.

"This starts to bring back memories of the whole Lenovo-IBM deal," said IDC's Ma. "Can you integrate the operations of the two organisations quickly enough to reap the benefits of that kind of scale? That remains to be seen."

Acer also reported on Monday second quarter results that were in line with market expectations. Its second-quarter profit fell 35.7 percent to T$1.983 billion (US$60 million) in line with market forecasts.