After competition from the iPad battered Acer Inc. (2353) and left it trading at an 85 percent discount to sales, Asustek Computer Inc. (2357) can become the world’s biggest personal-computer maker by acquiring its Taiwanese rival.
Demand for low-cost personal computers had made Taipei- based Acer the world’s second-largest by shipments in 2009 before it slipped to third as tablet computers supplanted PCs. Acer, which reported its first annual loss in 2011, has a market value of $2.4 billion after falling about 75 percent from a high reached shortly before Apple co-founder Steve Jobs unveiled the iPad in January 2010. Acer now trades at 0.15 times revenue, one-third the valuation Asustek fetches, according to data compiled by Bloomberg.
By acquiring Acer, Taipei-based Asustek would gain a sales network and brands to push the superior technology and higher- priced products that allowed it to avoid head-on competition with the iPad, Sanford C. Bernstein & Co. said. Asustek designed Google Inc.’s new Nexus 7 tablet, while Acer owns the Gateway and Packard Bell brands. Combined, the companies would hold 18 percent of the global PC market, overtaking Hewlett-Packard Co. (HPQ:US) for the top spot, according to market researcher Gartner Inc.
“They have complementary strengths,” said Jenny Lai, a Taipei-based analyst at HSBC Holdings Plc. “Asustek is relatively small so they could acquire Acer’s scale, lowering their cost structure while being able to develop good products, which is already its strength.”
Acer rose as much as 2.5 percent today, the most in two weeks, and ended up 1.2 percent at NT$26.45. Asustek gained 1.5 percent to NT$299, while Taiwan’s benchmark Taiex Index rose 0.4 percent.
Acer spokesman Henry Wang declined to comment on the prospect of a deal with Asustek.
“We have no such plans,” said David Chang, Asustek’s chief financial officer. “We prefer organic growth because M&A has many challenges. Our weakness was in channel distribution which we’ve improved a lot in the past two years.”
Founded in 1976, Acer rose to prominence as a contract manufacturer for International Business Machines Corp. before releasing products under its own name starting in 1987. The company spun off its manufacturing operations in 2000 and acquired Irvine, California-based Gateway Inc. for $755 million in 2007, adding another brand name and boosting U.S. sales. It purchased Netherlands-based Packard Bell BV a year later.
Those acquisitions, and a focus on producing low-cost computers, propelled Acer past Dell Inc. (DELL:US) to the No. 2 rank by unit shipments in 2009, according to Stamford, Connecticut-based Gartner. Sales peaked at NT$629 billion ($21 billion) a year later as the company shipped 39.9 million units, data compiled by Bloomberg and Gartner show.
With an average selling price of $499.50, Acer’s PCs are the cheapest among brand-name vendors, according to data compiled by Bloomberg.
The focus on keeping costs low and undercutting rivals on price meant Acer eschewed research spending in favor of adopting Wintel systems, Intel Corp.-based PCs using Microsoft Corp.’s Windows operating software. With Apple’s iPad denting demand for cheap PCs since it went on sale in 2010, the lack of new technology has become a liability for Acer, said Christine Wang, an analyst at Daiwa Securities Group Inc. in Taipei.
“In the past, Acer relied too heavily on contract manufacturers to design their products, so all they had to negotiate on was cost, cost and cost,” she said in a telephone interview. “The feedback now is that their products are not interesting and people don’t want to buy them, so they need better products.”
Sales dropped 24 percent last year, leading Acer to post its first annual loss. The company’s shares have tumbled 75 percent from a high reached on Jan. 15, 2010, leaving it valued at NT$70.7 billion, or about $2.4 billion, yesterday.
At its closing price of NT$26.15 yesterday, Acer is valued at 0.15 times its sales of NT$469 billion in the twelve months through June, data compiled by Bloomberg show. That compares with a median of 0.45 times sales for 44 computer hardware makers worth more than $1 billion, the data show. Asustek is valued at 0.51 times, and Apple at 4.16 times.
The drop has made it an affordable target for Asustek, also known by its brand name Asus, said Roxy Wong, former head technology analyst at Mirae Securities Co. in Hong Kong, whose research led him to the conclusion that a tie-up would be the best option for Acer.
“We’re changing to a world where you can’t simply rely on Wintel, there’s many alternatives now and you need R&D to have production differentiation,” Wong said. “I’d been asking the question: ‘Is there any way out for Acer?’ after their management had focused on channel marketing and not on R&D. At the same time Asustek requires a channel, which Acer offers, and has strong research spending.”
Asustek, founded in 1990, is the largest manufacturer of motherboards and graphics cards, critical components hidden inside a computer, and in 2007 was the first company to develop the netbook -- small, low-priced laptops that reignited the PC market just as the global financial crisis crimped spending.
Also the first to release an Ultrabook -- a slim, metallic notebook that mimics Apple’s MacBook Air -- Asustek developed Google’s answer to the iPad, the Nexus 7 tablet, which began shipping in July.
The product innovations stem from Asustek’s willingness to spend on research and development. Last year, that spending accounted for 2 percent of sales, compared with 0.24 percent at Acer, data compiled by Bloomberg show. Acer yesterday released a statement saying that it will focus on marketing over research as it named a new chief marketing officer.
“In the product development stages, we will place marketing ahead of R&D and design,” J.T. Wang, Acer’s chief executive officer, said in the statement.
Though it is the fastest-growing large PC maker, with shipments climbing 38.6 percent in the second quarter compared with a 0.1 percent decline in the overall market, Asustek sold less than two-thirds of the PCs Acer did, and half those of No. 2 Lenovo Group Ltd., according to Gartner.
“Asus doesn’t advertise or distribute its products in a way that’s effective,” said Alberto Moel, a Hong Kong-based analyst at Bernstein. “What Asus brings to the table is strong products and engineering. What Acer brings is distribution.”
Asustek, with a market value three times higher than Acer’s, would likely fund an acquisition using its shares, said Wong. The company, which is also planning to sell down its 24 percent stake in Pegatron Corp. (4938), a former manufacturing unit that was spun off in 2010, could also tap some of the NT$60 billion of cash Acer held at the end of March, he said.
The stake in Taipei-listed Pegatron, one of two manufacturers of Apple’s iPhone, is worth about NT$21 billion, while Asustek had another NT$66 billion in cash and short-term investments at the end of March, according to data compiled by Bloomberg.
A takeover of Acer would be bigger than any deal Asustek has undertaken, with its largest acquisition to date a NT$8.7 billion purchase of network equipment maker Askey Computer Corp. announced in 2005. If it fetches the average 27 percent premium paid in computer takeovers worth more than $100 million over the past decade, Acer would cost almost NT$90 billion.
“They may not have the kind of management required to pull it off,” Moel said of Asustek. “In such a deal, management needs to make tough decisions.”
Still, what it does have is the technology Acer needs to revive its flagging sales, said Wong.
“Asustek is one of the few companies in Taiwan that has the engineering capability to join with Acer and give it the technology it needs,” he said.
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