Lenovo-Packard Bell Merger Hit by Acer-Gateway Deal

Acer Inc.'s agreement to acquire Gateway Inc. has foiled Lenovo Group Ltd.'s plans to buy PC vendor Packard Bell BV, and could leave Acer owning both Gateway and Packard Bell.

On August 7, Lenovo revealed it was in discussions with Packard Bell over a possible acquisition. At the time, it looked like Lenovo had beaten Acer, which was also interested in acquiring the company.

However, Acer's plan to buy Gateway for US$710 million, announced Monday, trumps anything Lenovo brings to the table in its negotiations with Packard Bell.

In 2006, Gateway signed an agreement with John Hui, Packard Bell's largest shareholder, that gives Gateway the right of first refusal if he decides to sells PB Holding Co. SARL, the parent company of Packard Bell.

What that means is that if Packard Bell wants to enter into a final agreement to be purchased, the company has to ask Gateway first, said Y.T. Du, of Citigroup Global Markets Inc., which represented Acer in the negotiations. Gateway can refuse the deal if it wants and enter into purchase talks with Packard Bell, he said.

That is exactly what Gateway has done, announcing plans to exercise its right of first refusal at the same time the Acer deal was unveiled.

The agreement between Hui and Gateway is rooted in Gateway's 2004 acquisition of eMachines Inc., a PC vendor that Hui founded. When Hui acquired his stake in PB Holding Co., he granted the right of first refusal to Gateway in exchange for the company waving parts of the noncompete agreement that Hui signed when eMachines was sold.

Now that Gateway has entered into talks to acquire PB Holding from Hui, Acer could end up owning both Gateway and Packard Bell. While a Packard Bell acquisition would increase Acer's market share in Europe, a deal also means Acer will face having to integrate two companies with its existing operations instead of only one.

"Acer is still really strong in Europe," said Bryan Ma, director of personal systems research at IDC Asia-Pacific. Ma worried that Acer's desire to acquire Packard Bell is driven more by a desire to slow Lenovo's growth in Europe, rather than a pressing need to strengthen its own position there.

A Lenovo spokeswoman was not immediately available to comment.

(With additional reporting by Dan Nystedt in Taipei.)

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