Acer Chief Promises No Gateway Layoffs

J.T. Wang talks about the Taiwanese company's rationale for buying also-ran American PC maker Gateway as well European company Packard Bell

by Bruce Einhorn

For two months, Acer Chairman and Chief Executive Officer J.T. Wang has been trying to win over skeptics who have been questioning the wisdom of the Taiwanese computer company's acquisition of Gateway. In late August, Wang and his No. 2, Acer President Gianfranco Lanci, sealed a $710 million deal for the American PC maker. The acquisition, Acer executives argued, would help win customers in the U.S., where Acer traditionally has been weak. Moreover, the combination of Acer, Gateway, and Packard Bell (the European PC maker that was also part of the deal) would leapfrog the company ahead of Lenovo (SEHK) to become the No. 3 computer brand worldwide (BusinessWeek.com, 8/27/07), behind only Hewlett-Packard (HPQ) and Dell (DELL).

But investors were not impressed, sending Acer's Taipei-traded shares plummeting 12% after news of the deal broke. Some worried that Wang and Lanci had overpaid for Gateway, a company that had definitely seen better days. Once one of the top brands in the U.S., Gateway had fallen to No. 5 in the American market.

Today, Wang is getting more of a hearing. On Oct. 26, he told reporters in Taipei that the company shipped 5.44 million computers in the third-quarter, a 59% leap from the same period in 2006. Acer's quarterly profit jumped 58%, to $90 million, on sales of $3.76 billion. Acer's stock has recovered from its August swoon and on Oct. 29 hit a 52-week high ,at 77 Taiwan dollars, up from 55 in the aftermath of the Gateway announcement. In an interview before the earnings announcement, Wang spoke with Bruce Einhorn, BusinessWeek's Hong Kong bureau chief, about the logic of the Gateway deal and why the company's American employees should not fear a Taiwanese takeover.

Many people complained after you announced the Gateway acquisition that Acer had paid too much for what is, at best, a second-tier brand in the U.S. What do you say to critics of the Gateway deal?

The price is high, the price is low, that depends on how much you can make from the acquisition. In the coming three to five years, if you can make more than the amount you paid, that justifies the transaction. We have high confidence to capitalize on the synergies. There are over $150 million per year in synergies, easily, mainly from cost savings, through bigger quantity procurement. I am confident that another 20% will be secured. So this is a rational decision, a well-calculated strategic move.

Still, Gateway has fallen so much from its heyday. Is this another example of an Asian company overpaying to acquire a tired old Western brand?

This deal is an extension of Acer's existing competitive advantage. We do very little corporate account business; we are mainly strong in the consumer and SME [small and midsize enterprises] channels. Gateway and Packard Bell are mainly in the consumer channels.

Acer's had very little luck in the U.S. The company pulled back from the market in the late 1990s and hasn't made much of an impact. So why should the acquisition of an also-ran like Gateway make a difference?

We have been in the U.S, having more aggressively re-entered [the market] for three to four years. We understand what's going on in the market, in the channel, in the user requirements. We can draw a clear picture now. We understand how to combine the puzzle, to become a more powerful business operation. Realistically, Acer still has low awareness in the U.S. in brand positioning. That's the reality. That makes our U.S. business model very difficult.