Acer finally thinks outside the box
Acer Inc has finally done something important to elevate its global status in the personal computer business: The company announced last week it would acquire Gateway Inc, the fourth-biggest PC vendor in the US.
The company said its goal was to overtake Chinese rival Lenovo Group Ltd as the world's third-largest PC vendor behind Hewlett-Packard Co and Dell Inc. The deal is expected to close by December.
But Acer's ambition for an ever-increasing world market share convinced neither investors nor industry analysts.
The company's stock price plunged by the daily limit for two consecutive days right after the purchase announcement, rattled by concerns over whether Acer was paying too much for a US company that is fast losing market share.
Acer's cash tender offer for Gateway would price the US company at US$1.9 a share, which translates into a 57 percent premium on Gateway's closing price on the New York Stock Exchange on Aug. 24, a level that is compared to an industry average of up to 20 percent premium.
An overpriced deal? Is that possible for a company that posted NT$44 billion (US$1.33 billion) in cash holdings in its first-half financial book? Is it a necessary trade-off between shareholder value and potential returns in the future?
It is an expensive deal to some extent. Part of this is because Acer will not only pay US$710 million to buy Gateway, but also need to shoulder Gateway's approximately US$300 million in debt, as well as whatever price Gateway pays to purchase Packard Bell BV, a European computer maker that Gateway has priority to acquire. Lenovo is also eyeing the European maker.
Whenever one talks about "overpriced" and "underpriced" in the world of acquisitions, one must consider the possible impact of the deal on the acquirer's finances, the integration costs likely to be incurred and the expected synergies in the long term.
It is clear that Acer must pursue acquisitions if it wants to succeed. This is inevitable because the company cannot rely solely on organic growth to pursue new markets and growth drivers in an industry where the competition grows ever fiercer.
But it's not yet clear whether acquiring Gateway will be an effective defense against Lenovo buying out Packard Bell and expanding its European presence. How will Acer respond if Lenovo pursues Packard Bell and offers a much higher bid?
One strong advantage of Acer's strategy is that acquiring Gateway will boost revenue through cross-sales and put Acer in a better position to negotiate for lower procurement costs. In this way, the company hopes to save US$150 million a year.
But regardless of its strong manufacturing skills and cost control ambitions, Acer should not underestimate the risks this acquisition entails. One challenge will be how Acer will manage multiple brands (Acer, Gateway, Packard Bell and eMachine). How well will Acer execute a product positioning strategy that is suitable for various market segments? Integrating supply chains and streamlining distribution channels will also prove challenging.
A question that comes to mind is whether Acer will suffer the same troubles BenQ Corp met after acquiring Siemens AG's handset unit in October 2005.
Hopefully we will not see a repeat of that episode. Acer has built a more solid reputation than BenQ had at the time in internationalizing itself, and this is a key difference. Nevertheless, Acer should brace itself for the hard work ahead. It will take time to reorganize its business and integrate employees that are used to a different corporate culture. The decision is made, and now the world of business will watch eagerly to see the result.
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