ALL FOR ONE – ONE FOR ALL

Acer to buy Gateway, Gateway to buy Packard Bell
by: Jerry Liao

In his book, Alvin Toffler said that bigger companies will acquire smaller companies either to strengthen their offerings or to lessen their competitions. Toffler also mentioned that in every industry, only the fittest will survive. Consolidation will happen, and only a few brands will be left.

In the I.T. industry, acquisitions are all over: Lenovo buying IBM PC, HP acquiring Compaq, EMC bought VMWare, Cisco acquiring LinkSys, Google buying YoTube, Oracle and Microsoft also buying companies left and right. The list goes on and on, and if the list is not enough proof of what Toffler said, here’s another one:

Acer Inc. announced it has entered into a definitive agreement to acquire Gateway, Inc. Gateway is the fourth largest PC company in the US and a leading retail PC provider. The combination will create a multi-branded PC-company with over US$15 billion in revenues and shipments in excess of 20 million PC units per year.

Under the terms of the agreement, Acer will commence a cash tender offer to purchase all the outstanding shares of Gateway for $1.90 per share, which represents total equity value consideration of approximately $710 million. The acquisition has been unanimously approved by the boards of directors of both Gateway and Acer and is subject to standard closing conditions, including approval under Hart Scott Rodino, Exon Florio and similar laws outside the U.S. The acquisition is expected to close by December 2007.

Gateway earlier announced that it intends to exercise its Right of First Refusal to acquire from Lap Shun (John) Hui, all of the shares of PB Holding Company, the parent company for Packard Bell BV – a leading European PC vendor based in France. In addition, Gateway is currently in discussions with a third party with regards to a sale of its U.S. based Professional business.

“This strategic transaction is an important milestone in Acer’s long history” said J.T. Wang, Chairman of Acer. “The acquisition of Gateway and its strong brand immediately completes Acer’s global footprint, by strengthening our US presence. 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 number three PC vendor globally.”

Gianfranco Lanci, President of Acer, added, “Both Acer’s and Gateway’s geographical presences and product positioning are highly complementary. We believe that our combined scale will lead to significant efficiencies. Gateway has built one of the industry’s most powerful and unique brands and with this acquisition, we will have the opportunity to implement an effective multi-brand strategy and cover all the major market segments. In time, we intend to actively manage our brand portfolio and differentiate our brands to address different consumer segments. We are also acquiring a world-class team and Gateway’s employees will be critical to our combined success.”

“We believe our complementary geographical and product mixes, and our mutual focus on the consumer market makes Acer an outstanding partner for Gateway.” explained Ed Coleman, CEO of Gateway. “Joining with Acer will enable us to bring even more value to the consumer segments we serve and capitalize on Acer’s highly regarded supply chain operations and global reach to expand the scope of the Gateway and eMachines brands around the world. Acer has made impressive strides in the global PC market and the board and I welcome this merger.”

The combination of Acer and Gateway is expected to result in significant revenue and cost synergies. The considerable increase in scale will result in reductions in per unit procurement and component costs for both companies. This combination also creates a real opportunity for the cross-selling of product portfolios by leveraging the customer relationships of both Acer and Gateway. Significant savings are also expected through the increased efficiency of the combined back-office functions. The pre-tax synergies are expected to be at least $150 million. In addition, this transaction is expected to be accretive to Acer’s earnings per share in 2008 without synergies.

Why is this happening?

William Knoke, president of the Harvard Capital Group investment firm calls it the “Amoeba Form”. It is like the jellylike blob of cytoplasm seen under the microscope: it is amorphous, changeable, and conforms in shape to its environment; it is difficult to distinguish where one ends and the next begins. Watts Wacker, co-founder of the FirstMatter consulting firm said by teaming up with other companies, the corporation of tomorrow will be able to assemble the strengths of many partners to become far more nimble and responsive. It will exist in a world of varied, complex, and powerful relationships – a world where “your biggest competitor also may be your most important ally” and “your most important employee will also be working for your biggest competitor.

Business wise, the consolidation of Acer / Gateway / Packard Bell may result to a bigger market share for Acer to better compete with Dell and HP. Consumer wise, we will still have options and choices when buying our next computer. The only difference now is we will now have “quality choices” and hopefully competitively priced as well.

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