First we'll take Gateway, then we'll take Packard Bell 27 August, 2007 By Liam Lahey

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Gateway is the fourth largest PC vendor in the U.S. and a top retail PC provider. The Acer acquisition would create a multi-branded PC company with over $15 billion in revenues and shipments in excess of 20 million PC units per year, officials said.

Acer would purchase all the shares of Gateway for $1.90 per share, which represents total equity value consideration of approximately $710 million. The acquisition is expected to close by December 2007.

Gateway had earlier announced that it intended to acquire all of the shares of the PB Holding Company, the parent company for Packard Bell BV. Moreover, Gateway was reportedly in discussions with a third party regarding the sale of its U.S.-based professional business services. "Lenovo was the lead bidder for Packard Bell until Acer moved around Lenovo by acquiring Gateway, a company that has the first right of refusal for Packard Bell. The business market is a very low margin, has very low growth, has long lead times, and it is currently wondering why it buys PCs at all with increasing speculation that it will allow/promote employees buying their own PC products," he said. "Look at Apple's growth, which is all consumer, and HP's consumer growth, as the mobile consumer was a whopping 70 per cent for them last cycle."

Acer wants to be number three and it is in a position to get there, Enderle continued, as it fancies taking a run at Dell and HP while better defending against Asus which was coming up fast.

"This in many ways this pits the future of Lenovo (as they move back into consumer segment) against Acer hard," he said, adding Acer's market share was more likely at risk due to Lenovo's reach into the global consumer PC segment. "Not that there is ever any competition between Taiwan and China."

Warren Shiau, senior associate and lead analyst, IT research, The Strategic Counsel, said Gateway has been struggling for a long time.

The company's brand has zero reach in the enterprise market, and it's not a top player in mid-market either, which leaves the consumer/retail segment and a limited attractiveness as an acquisition target in general.

"I don't think HP or Dell would have ever bought Gateway," Shiau said.

However, this is where the story gets interesting, he remarked, with Acer and Lenovo tooth-and-nail for market share behind HP and Dell.

By acquiring Gateway and Packard Bell (most industry analysts anticipate this would happen in the coming days), Acer would likely get 15 per cent to 20 per cent more unit volume per year, he reasoned. And if PCs are going mass market/commodity, it actually is a good idea to be getting big box consumer electronics store shelf space and keeping it away from one's competitors.

Shiau acknowledged Acer's rumored acquisition of Packard Bell could cut off an easy entry to the European market for Lenovo.

"Packard Bell is definitely a regional European player, but it's not a major force in the European market," he said. "If you're starting from scratch, buying Packard Bell could save you some time, but it's not exactly a make or break type of acquisition."

The PC market has been all about basic operational execution for the past several years and that's probably the issue here, Shiau added.

"Acer is buying a company (maybe two) that have been operationally challenged for a while," he said. "It's not a simple case of acquiring market share, it's the more difficult case of getting share and then having to fix some things up."

Meanwhile, David Daoud, analyst, Personal Computing and PC Tracker Programs at IDC Corp., said Packard Bell is certainly poised to be apart of an ongoing battleground between Acer and Lenovo.

Lenovo had expressed interest in Packard Bell previously, but Acer is not likely to let it go now that it has Gateway on its side, he said.

"The implications for Acer with a Packard Bell acquisition are extremely important in Western Europe, but not much elsewhere," Daoud remarked. "If Acer ends up acquiring Packard Bell, it will not only block Lenovo from expanding through acquisition, but more importantly, Acer will stand the chance to compete directly with Dell for the second spot."

IDC figures showed Dell's 2Q07 market share in Western Europe to be at 16 per cent. But if you add Packard Bell's three per cent share to Acer's 13.9 per cent share, Daoud explained, you now have a totally different dynamic in favor of Acer.

"Acer has all the good reasons of the world to buy Packard Bell," he added.