Acer + Gateway + Packard Bell to Create Global PC Powerhouse

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As officials from all three major companies involved confirmed to the press during the overnight hours in North America, global #3 PC manufacturer Acer has reached an agreement to acquire Gateway, America's #3 manufacturer, for $710 million.

And in a possibly contingent move, Gateway will use some of that immediate cash infusion to exercise its right to preclude Lenovo from acquiring Packard Bell from California investor Lap Shun Hui, who purchased it from NEC just last year.

Assuming the multi-part deal closes by this December as currently scheduled, the move is expected to double the number of PCs shipped under the Acer brand both to the US, where it's currently the #6 supplier, and to China where the Packard Bell brand enjoys prominence. If that happens, Acer could find itself wrestling for the first time with Dell for the global #2 position throughout 2008.

Ironically, Hui sold his stake in eMachines to Gateway in 2004 to help him mount a takeover of Packard Bell. Now, what remains of eMachines will be joined with the same company that owns the Packard Bell name.

Acer said its goal for 2008 is to sell 20 million PCs per year, while doubling its commitment to markets outside its traditional territories of Europe and Asia. This may actually be a conservative estimate. For 2006, hardware analysis firm iSuppli predicted Acer shipped 13.2 million PCs worldwide. But for the first quarter of 2007 alone, Acer officially toppled Lenovo for the world's #3 spot, shipping 4.2 million PCs in just that quarter.

Assuming the company were to maintain its virtually astronomical 45.8% annual shipment growth rate, as iSuppli projected in June, just Acer by itself could ship nearly 19.3 million PCs by the end of the year without Gateway's or Packard Bell's help.

By the standards of the PC industry in the late 1990s, today's Gateway is a company on life support. A few weeks ago, it reported its previous quarter's revenue was down about 8.5% annually. That revenue comes from three divisions: retail, professional, and direct sales. A staggering 73% of its revenue now comes from the retail segment.

But most of that business is on account of the eMachines brand; the Gateway brand holds up the other fourth of the company. Sales to business customers -- once Gateway's bread-and-butter -- amounted to a measly $171 million in the last quarter. This morning, Gateway said it's putting its professional division up for sale, though it's not known at this point who might want it - apparently not Acer.

Even if Gateway ends up having a bad year in 2007, next year it could still add another four to five million units to Acer's overall footprint. Packard Bell's strengths, meanwhile, are in Western Europe - mostly in France, where Gartner sees it as the #4 supplier - and in China. But estimates of that formerly private company's shipments to both those regions vary wildly, from as few as half a million to 2.5 million PCs shipped to Europe last year.

It isn't clear how to track mainland China as a market just yet, judging from the fact that its own business journals don't often agree with one another, though European sources believe China's PC market as a whole is growing at a 30% annual rate.

Dell's shipments meanwhile are declining, and will probably continue to do so as the company rebuilds itself and tries to emerge from what, for any other company, would be a crippling financial scandal. Still, Dell would have a long way to fall to meet Acer, with more than double Acer's global shipments in Q1 2007. Assuming Dell can continue to tread water, it may yet ship 36 million PCs worldwide this year.

End of an American icon

This morning's announcement brings to an end a long and difficult chapter in the history of Gateway, once considered one of America's manufacturing success stories. At one time, Gateway founder Ted Waitt was considered a potential American business icon, alongside Michael Dell and Bill Gates, having literally planted the seeds of his company in a barn outside Sioux City, Iowa.

During the height of the made-to-order "PC clones" boom of the 1980s, the former Gateway 2000 was known for its glossy, catalog-sized monthly inserts in Computer Shopper magazine. There, company employees including Waitt and other top executives would dress in sometimes ridiculous costumes, often re-enacting scenes from movies while showcasing their company's latest models.

At the time the company needed a ticket into big business sales, Waitt and his team brilliantly realized executives were judging the durability and reliability of systems not by the integrity of their software but by the feel of their keyboards. So Gateway invested a large chunk of money into manufacturing the AnyKey keyboard, which many enthusiasts continue to keep pristine to this day, even after over a decade of use.

In June of 2000, at the height of the proverbial "Internet bubble," Waitt was heralded by BusinessWeek magazine as "an unlikely visionary," with a goal of providing "an IT department for the masses." In that article, he admitted he courted the idea of a merger with Compaq, but broke off discussions after deciding he didn't want to work for anyone else. Just six months later, he would find himself attempting to resurrect his company with exactly the move Michael Dell is trying today: ousting the CEO he himself appointed, and re-assuming the title.

But Waitt was unable to combat Gateway's image problem. During the downturn of the US PC market, marketers struggled to move Gateway away from its jovial, barnyard motif into a more generic, forward-thinking corporate image.

The company would end up see-sawing back and forth between "Green means go" and "Mo-o-o-o," while the company's ticket into big business was quickly becoming its ticket out: Incompatibility problems between Gateway's keyboards and Windows led to customers discovering Gateway's newly outsourced customer service. Suddenly, the company became the symbol for the disconnect between suppliers and customers. No longer the friend of the everyman, Ted Waitt exited Gateway in 2005.

As the company's reliance upon its eMachines brand shows, there really hasn't been a Gateway computer company of any serious strength since then. Now, the company that briefly made the phrase, "Computers from Iowa?" a staple of PC geeks' T-shirts everywhere may, before the year is out, become absorbed into the foundation of a mercurial company whose true presence in America has yet to be felt.

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