Taiwan's Acer snags Gateway

SAN FRANCISCO — Gateway, once one of the highest fliers of the personal-computer industry but in recent years reduced to a niche player, said Monday that Taiwanese PC giant Acer is buying it for $710 million.

Although the price represents a 57 percent premium for Gateway stock, it's far below the all-time high of $84 in November 1999.

Acer plans to keep the familiar U.S. Gateway brand, known for its cow-spot logo. It's also keeping the eMachines brand, which Gateway acquired through a 2004 merger.

The deal "creates a more diversified and formidable company," Acer CEO J.T. Wang said.

However, despite Gateway remaining one of the top PC sellers in the U.S., its sales have declined dramatically compared with the overall market and the performance of its competitors.

According to research firm IDC, Gateway's second-quarter PC sales in the U.S. fell 7 percent from a year ago. Acer was the No. 6 PC company in the U.S. during the second quarter of this year, but its U.S. sales rose almost 164 percent from last-year's second quarter.

Adding in Gateway's sales figures would lift Acer to the No. 3 rank behind Hewlett-Packard and Dell.

The acquisition would give Acer a stronger presence in North America, particularly in the lower end of the market. Both Gateway and Acer sell value-priced desktops and laptops, and they rely extensively on resellers and Internet sales.

BMO Capital Markets analyst Keith Bachman said Acer's acquisition appears to give it a better market position on paper, but it will have its hands full integrating and distinguishing the brands of Acer, Gateway and low-cost PC maker eMachines, which Gateway owns.

"Gateway as a company and a brand has struggled to resonate with consumers," Bachman said.

He added that in the retail market, "all three Acer [and] Gateway brands were chasing similar consumers," and that Acer will need to develop a clear product-segmentation strategy.

Acer has been believed to be in the market for a U.S. acquisition for a long time. Wang, its chairman, said in a statement that the acquisition "completes Acer's global footprint, by strengthening our U.S. presence."

The acquisition, which received the backing of both Gateway and Acer's boards, is expected to close by December, the companies said.

Under terms of the deal, Acer will pay $1.90 for each share of Irvine, Calif.-based Gateway, the one-time Wall Street star that's struggled since the end of a high-tech boom in 2001.

After the deal's announcement, Gateway's shares soared 60 cents, or nearly 50 percent, to close at $1.81.

Upon acquiring Gateway, Acer will vault above Lenovo Group to become the No. 3 PC vendor globally. The combined company would generate $15 billion in annual revenue and account for more than 20 million PC shipments each year.

The two companies expect to generate savings of up to $150 million from eliminating duplicate operations and from wielding greater purchasing power. By negotiating larger component purchases, Acer should be able to secure lower prices.

The deal signals the end of a run for Gateway that spanned much of the PC era in which the company followed the classic example of a one-man startup and became an industry icon — only to falter during an economic downturn and never fully regain momentum.

Founded in 1985 by Ted Waitt in an Iowa farmhouse, Gateway became quickly known for three things: Waitt's ponytail, the company's distinctive cow-spotted boxes and being based in South Dakota, as opposed to Silicon Valley.

Gateway moved its headquarters near San Diego in 1998, then to Irvine in 2004.

Gateway showed it could be ahead of its time when in 1996 it opened the first of its Gateway Country retail stores, setting a blueprint Apple would use to great success years later. By 1999, Gateway's market capitalization was estimated to be more than $27 billion.

However, a downturn in industry sales hit Gateway particularly hard in 2000 and led to the departure of CEO Jeffrey Weitzen in 2001. Weitzen was replaced by Waitt, who remained as CEO for the next three years.

Weitzen also had legal difficulties, as the Securities and Exchange Commission charged him in 2003 with fraud related to alleged material misstatements in a regulatory filing regarding Gateway's quarterly earnings in 2000. Those charges were later thrown out.

In April 2004, Gateway bought low-priced PC maker eMachines and named that company's CEO, Wayne Inouye, as its chief executive. One of Inouye's first steps was to close Gateway's remaining 188 retail stores, resulting in 2,500 job cuts.

Gateway never regained its footing, and Inouye was fired early last year.

Takeover talk began to grow a year ago, when Harbert Management disclosed it had acquired 10.2 percent of Gateway's outstanding stock and met with company executives to discuss ways to improve business and market positions.

Last September, the company turned down an offer from Lap Shun "John" Hui to buy Gateway's retail business for $450 million. Hui, the former owner of eMachines, owns about 8 percent of Gateway's outstanding stock.

Hui also controls PB Holding, the parent of European PC vendor Packard Bell. Gateway said it intends to exercise its right of first refusal to acquire Hui's stake in PB Holding.

Gateway said it acquired the right when Hui agreed to some noncompete deals when he bought Packard Bell.

Additionally, Gateway said it is also in talks with a "third party" over the potential sale of its U.S.-based professional business. When Gateway reported second-quarter financial results Aug. 2, the company said professional sales were $173 million, down 31 percent from the prior year.

Citigroup Global Markets acted as financial adviser to Acer, while Goldman Sachs served as adviser to Gateway.

Information about Acer's plans for the Gateway and eMachine brands provided by Gannett News Service