Traders Punish Acer for Gateway Purchase

Shares of Acer Inc. opened down by their daily limit on the Taiwan Stock Exchange early Tuesday, as investors took a dim view of its decision to buy U.S. PC vendor Gateway Inc.

Acer stock opened down 6.9 percent at NT$59.2 (US$1.79), the lower limit imposed by trading rules on the local stock exchange, and wallowed around that level for much of the early trading day.

"People think Acer paid too much for Gateway," said Andrew Teng, sales manager at Taiwan International Securities Corp. in Taipei. According to a rumor in the market, Acer and rival Lenovo Group Ltd. fought a bidding war for Gateway, upping the price, he added.

Lenovo declined to immediately comment.

Stock and industry analysts offered negative views of the deal, and some feared Acer could run into the same problem with the merger as Taiwan's BenQ Corp. did with its acquisition of Siemens AG's mobile phone division, a business that ultimately filed for bankruptcy protection in Germany. The Siemens deal proved to be too costly for BenQ, which couldn't turn the business around. The company, formerly part of the Acer Group, said it spent over US$1 billion trying to make the purchase work.

There are only a few parallels with the Acer-Gateway deal, mainly that Gateway is viewed as a business in decline.

"We are negative on this acquisition," wrote Daniel Chang, PC industry analyst at Macquarie Research Equities in Taipei. "Acer's brand has begun to attract U.S. consumers so we believe it would have been much cheaper to build U.S. market share on its own than to pay such a high premium for a declining market share PC company."

The company's U.S. market share dropped to 5.6 percent in the second quarter, down from 6.5 percent at the same time last year, according to industry researcher IDC.

Acer paid a 57 percent premium over Gateway's closing share price of US$1.21 last Friday, which was too high, Chang said.

Acer agreed to buy Gateway in an all-cash deal for US$1.90 per share, or around US$710 million. News of the deal sent Gateway shares up 50.4 percent, to US$1.82 per share, on the New York Stock Exchange on Monday.

Acer said the deal will transform it into a much larger company with US$15 billion per year in revenue and shipments of nearly 20 million [M] PCs and give it a solid base in the important U.S. market. The company plans to market multiple PC brands worldwide after the transaction, thereby increasing sales. The deal will also help it cut costs. Size is vital to gaining volume discounts from parts suppliers, the company said.

Analysts weren't convinced. Chang cautioned that Gateway's market share was on the decline anyway, and that if Gateway buys Packard Bell BV, which it has pledged to do, the deal will add another company to Acer's stable that it doesn't need. Packard Bell is strong in Europe, where Acer already holds significant market share.

Jack Gold, from industry researcher J. Gold Associates, said the Acer-Gateway combination brings little synergy to the market other than size.

"Both Gateway and Acer are primarily consumer brands, with little presence in the enterprise [market] -- where margins are higher, and where higher-end laptops, an increasingly important share of the PC market, are sold," he said in an e-mail.

Investment banking firm Goldman Sachs listed several positives for the deal in a report, but offered up a generally negative view overall.

In particular, the possible acquisition of two companies at once, Gateway and Packard Bell, could slow the process of bringing each company into the Acer fold.

"We think Acer may still experience the pain of consolidation of three different companies for a certain period of time," wrote Henry King, director of Asia-Pacific investment research at Goldman Sachs (Asia) LLC, in a report on Tuesday.

Goldman Sachs acted as an advisor for Gateway in the deal with Acer.

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