Acquisition of Gateway
Acer Shows Its Teeth
With its acquisition of Gateway, Acer has made its presence felt in the U.S. market, snatched the world number-three position from rival Lenovo, and declared itself a truly global enterprise.
Acer Shows Its TeethBy Ching-Hsuan Huang and Hsiao-Wen Wang
From CommonWealth Magazine (vol. 379 )
At 5 pm on 27 August, the face of the global PC industry was changed in an instant with Acer’s announcement of its biggest acquisition in its 31-year history.
At an impromptu press conference, company chairman and CEO J.T. Wang revealed Acer’s US$710 million acquisition of Gateway, the number-four PC maker in the U.S. market. The move solidifies Acer’s U.S. market position, while edging out rival Lenovo as the world’s number three PC maker.
During the joint video teleconference with Acer president Gianfranco Lanci and Gateway CEO Ed Coleman, Wang’s tone was measured as he coolly leaned back in his chair, his broadly beaming face occasionally revealing a touch of bravado.
“We needed to grow up fast and we needed to do it in one fell swoop,” said Wang, who abandoned his prior cautious conservatism and determined to widen the competitive gap with Lenovo through the acquisition. Following the acquisition, Acer’s projected operating revenue for this year will soar from US$11 billion to US$15 billion, good for an 8.8 percent share of the global PC market (See graph).
With this merger, Acer is showing some teeth. Despite a five-year stretch hovering between the red and the black, Gateway pulled in US$3.98 billion in operating revenue last year to remain number four in a U.S. PC market seized with merger-mania and long dominated by industry giants.
While the U.S. market has always been Acer’s biggest headache, the acquisition of Gateway will open a major door into that market, more than doubling Acer’s market share there from 5.6 percent to 11.7 percent, and making it number three in the U.S.
Offense is the Best Defense
Even more importantly, Gateway brings with them Packard Bell, the number-three PC maker in the European market which Lenovo had been aggressively pursuing. In early August Gateway announced it would exercise its right of first refusal to buy European player Packard Bell, acquired through a previous agreement,sending Lenovo home with head hanging.
“It’s a case of ‘besieging Wei to save Zhao’,” says Tony Tseng, senior director of equity research at Merrill Lynch, referring to the Battle of Guiling during the Warring States Period of Chinese history, in which the Kingdom of Qi attacked the capital of Wei to thwart an assault on its ally Zhao. Tseng further elucidates: “The best defense is a good offense.”
Henceforth, Acer will have to adopt a multi-brand strategy, including the marketing of Acer, Gateway, Packard Bell and eMachine, the low-cost computer brand Packard Bell recently acquired.
Reducing costs will be the immediate impact of multi-branding. “With the economies of scale achieved, cross-selling through shared retail channels, and reduced administrative and marketing costs, we project savings of US$150 million,” says Du Ying-tzyong, chairman of Citigroup Global Markets Taiwan, which negotiated the deal.
But the path of acquisition can be treacherous. Differences in terms of management teams, executive capability and corporate culture can be enough to trip up an ambitious executive.
After buying IBM’s PC unit for US$1.27 billion in 2005, Lenovo took two years to turn a profit and establish its corporate order. “This starts to bring back memories of the painful lessons of the whole Lenovo-IBM deal," Reuters reported.
“At the time, Lenovo was just a regional brand, the small devouring the large to acquire an international brand,” retorts Lanci, the Acer president. “Acer is already an international brand, the large devouring the small and acquiring a regional brand.”
In any case, compared with the US$965 million in accumulated debt accompanying the IBM PC unit at acquisition, Gateway, which last year turned a small profit of US$9.7 million, looks like an easily digestible growth remedy for Acer.
“The large devouring the small is a relatively safer path to acquisition, and it can extend Acer’s competitive strengths,” says J.T. Wang.
Perhaps the greatest significance of the Gateway acquisition is that after more than 30 years of branding efforts, Acer has finally achieved credentials as a truly global enterprise.
‘Arriving’ as a Globalized Enterprise
According to Wang, the global market is divided into three major component markets – Europe, Asia-Pacific and the Americas – the operating revenue and profit from any one of which must constitute more than 20 percent of the company total for it to be considered a true global enterprise.
After the acquisition, the singular position of Europe will change, with markets in the Americas and Europe each accounting for about 40 percent of Acer’s operating revenue; Acer will no longer be just a “European company.”
“Now I’m afraid it looks like we’ve got work to do in Asia,” says Wang, shedding his suit jacket while coolly stating Acer’s next challenge.
Exclusive Interview with Stan Shih:
A Milestone in Taiwan Branding
After its makeover in 2000, Acer established the internationalized foundations of a branded corporate operation and during the past several years this has amounted to gaining confidence and establishing a strong operational capability.
Following this merger, the world will be left with only a few brands; the dust has pretty much settled and there are four left. Thus, henceforth, the way forward is renewed devotion to operational efficiency.
The differences between this acquisition and Lenovo’s acquisition of IBM’s PC unit or BenQ’s acquisition of Siemens Mobile are: first, Acer is the large one eating the small, while Lenovo and BenQ were the smaller ones eating the large. Second, after all these years Acer has achieved a degree of internationalization with its localized management and our foreign workforce is extremely solid. Lenovo, of course, lags far behind [in these respects].
Third, the acquisition only accelerates Acer’s existing international position, which was otherwise stable. With BenQ and Lenovo, prior to their acquisitions they were both very regional brands, not international ones.
As for post-merger management, we have communicated in advance with Gateway executives. One characteristic of Acer is its ability to be very localized. It’s not easy for Americans to find this kind of boss. We must respect them and fully understand them so they may achieve their highest potential.
The prime aim of the future multi-branding strategy is to expand market share. Brands have to be managed to prevent conflicts that may potentially arise. Brand management is Taiwan’s biggest deficiency, but long-term development strategy may well necessitate multi-branding. How to position those brands will of course have to wait as details unfold.
The first step now is to stabilize the market as the multi-branding strategy will be the easiest to implement and immediately bring the effects of economies of scale to bear. As for the future, there are no absolutes, because the authority rests entirely with me. This is certainly a milestone in the ascendance of Taiwan branding, particularly in the future when we are able to solidify the number-three position. This is one of the world’s most important industries, and we have staked our claim. (Interview compiled by Ching-Hsuan Huang)
Translated from the Chinese by Brian Kennedy
Chinese Version: 宏碁併捷威 叼走聯想嘴邊肉