With Gateway, Acer Foils Lenovo

Taiwan's Acer strikes back at its mainland rival with an agreement to acquire Gateway, the third-largest PC brand in the U.S., for $710 million

by Bruce Einhorn

In Asia, few rivalries are as heated as the one between Lenovo Group and Acer, the top two computer companies in the region. Ever since Lenovo acquired the PC division of IBM (IBM) in 2005, the companies have been slugging it out for the No. 3 position worldwide, behind Hewlett-Packard (HPQ) and Dell (DELL). On Aug. 27, Acer announced a 36% drop in quarterly earnings, to $61 million, due in part to competition from Lenovo.

The rivalry between the two companies isn't just about desktops and notebooks. It's also about some unfinished business from 1949, when Mao Zedong took control of the mainland and sent Chiang Kai-shek fleeing across the Taiwan Strait. Lenovo is the top computer company in China, and many Communist officials look at it as leading the Chinese challenge to become a global tech power. Acer is the champion from Taiwan, an island that is trying to maintain its status as a global tech hub while politically resisting Beijing's efforts to absorb it back into the Chinese motherland.

The fight between the two companies has just gotten even rougher. Late in the afternoon in Taipei on Aug. 27, Acer announced that it was acquiring Gateway (GTW), the third-biggest PC brand in the U.S., for $710 million. Not only will that deal help Acer leapfrog back in front of Lenovo for the No. 3 spot worldwide, it will also stymie the Chinese company's plans to expand in Europe. Lenovo on Aug. 8 had announced that it was in negotiations to acquire Packard Bell to boost its position in Europe, where Lenovo is much weaker than Acer, says Martin Gilliland, a PC analyst in Singapore with Gartner (IT).

Blocking the Packard Bell Deal

Acer had been rumored to be looking at Packard Bell, too, and the announcement early this month that Lenovo had the edge in the race to acquire it was a blow to the Taiwanese. Now, however, Acer is able to prevent Lenovo from proceeding with the Packard Bell deal. That's because Gateway happens to have right of first refusal to buy Packard Bell, and at the same time that Acer announced its purchase of Gateway, it also said that the American company plans to exercise that right of first refusal, taking a prize away from Lenovo and giving it to Acer.

That neat blocking move impresses some industry watchers. "The best defense is offense," explains Tony Tseng, an analyst with Merrill Lynch (MER) in Taipei. Given the moves by Lenovo, "they feel they need to go out and be more aggressive," he says, adding that Acer should be able to manage the Gateway acquisition well since the price tag is below 20% of Acer's market capitalization. "It's a reasonable size," he says.

Acer executives such as Chairman J.T. Wang and President Gianfranco Lanci have often said publicly that they intend to eclipse Lenovo, for instance, and take over its No. 3 slot. In the first quarter of 2007, Acer did indeed pass Lenovo, but the Chinese company came roaring back in the second quarter to reclaim its spot. Now, the Gateway deal puts Acer ahead again, with combined sales in 2006 of 18.6 million machines, compared with 16.6 million for Lenovo.

A Fight for Bragging Rights

Some analysts, however, have concerns that the fight between the two companies is getting out of hand. "I'm worried that a lot of it is driven by pride," says Bryan Ma, a computer-industry analyst in Singapore with International Data Corp. (IDC) "It's about having bragging rights."

That said, Ma agrees that buying Gateway does make sense for Acer, which could use a boost in the U.S. market, where Acer is only No. 6. Gateway's No. 3 slot, on the other hand, gives it 5.6% of the market. The combination still leaves Acer far behind Dell and HP, but it does at least put the Taiwanese company in the game. "They needed a stronger position in the U.S., and Gateway can provide that for them," says Ma.

The challenge now, of course, will be integrating Gateway. "They really have to turn that business around," says Gilliland. "It's O.K., but nothing like Acer. They intend to buy it and turn it into a fast-growing company."

Acer does have some experience acquiring U.S. companies. It purchased the notebook PC business of Texas Instruments (TXN) in 1997. But a decade ago the PC business was very different from today, with brands like IBM still independent. As Acer tries to digest its new American acquisition, the company's executives will probably be looking closely at Lenovo for lessons on how to go about absorbing a well-known American brand.

Einhorn covers the computer industry in Asia for BusinessWeek