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Acer seizes opening with Gateway

The Taiwanese PC maker has been growing fast. With Gateway, it gets a bigger foothold on U.S. soil.

Acer needs help getting ahead, and Gateway needs help keeping up. Both hope a merger will do the trick.

The Taiwanese PC maker announced Monday that it would purchase Irvine, Calif.-based Gateway for $710 million, or $1.90 per share.

It's not completely unexpected. Acer said earlier this year it was in the market for a smaller PC company, and intended to pass Lenovo as the world's third-largest PC company. This deal should do just that. The two companies combined shipped 18.6 million units and covered 8.1 percent of the worldwide PC market, according to research firm IDC. That would put Acer behind Hewlett-Packard and Dell, and squarely ahead of Lenovo.

"We're at a state where this makes sense. The PC market is a mature market, and consolidation is the way these companies are going to get to fast growth," said Richard Shim, an analyst with IDC.

"Fast growth" is the name of Acer's game. It's been the world's fastest-growing PC maker for the past three years in a row. In 2006, the company's shipments grew by almost 40 percent.

For Acer, the acquisition is also about grabbing a larger chunk of the U.S. market. Despite its swift rise to the top tier of PC makers in units shipped, it's been more difficult for the company to get its notebooks on retail shelves. And Gateway has floundered for several years, so the deal seems to make sense for both companies.

But will it work? Acquiring a struggling PC maker has historically been a difficult thing to do, particularly given the low margins in the market. "One example that has been successful has been HP's acquisition of Compaq. But that took three years to come to fruition," said Gartner analyst Charles Smulders. "I think, in this case, Gateway has gone through a period of cutting costs so it's a very streamlined organization, which should make integration an easier process."

Gateway, of course, needs the help. The company has struggled in the highly competitive notebook market. Though its retail presence was initially successful, staying competitive with price reductions led by HP and Toshiba in the midprice notebook market is difficult. The company hasn't had better luck on the retail desktop side.

"The Gateway brand had been strongly positioned as a midpriced brand at retail. eMachines has been branded at an entry-level price point, but it's struggled in the last year as consumers have been replacing entry-level desktops with entry-level notebook purchases," said Stephen Baker, vice president of industry analysis at NPD Group.

Acer should benefit immediately from Gateway's strong brand-name recognition in the U.S. Longer term, Gateway brings to Acer its established relationships with retailers. Acer said it plans to keep the Gateway brand in the United States, which could help it wield a two-pronged brand strategy in the same way as HP has done with Compaq.

Gateway already has a two-brand strategy, with Gateway positioned in the midlevel price range and eMachines as its entry-level brand, after acquiring the small company in 2004. But analysts seem split on whether Acer will keep the eMachines brand.

In the low-end desktop market, the Acer and eMachines brands are pitted directly against one another, which could mean doing away with the eMachines name, Baker said. However, eMachines has been positioned for retail and Gateway for direct sales, Shim pointed out. Gartner's Smulders expects Acer to divest the combined company from the professional segment of the business and focus squarely on retail.

Either way, Acer will need to identify the key strengths of the Gateway brand and clearly communicate those to buyers. Though Gateway is a known name--and has that recognizable cow-print logo--what exactly the name means to customers is hazy.

"Very few understand what it stands for," Smulders said. "They need to establish what the focus of the brand really is, whether it's great service and support, whether it's leading technology or the center of your digital home. (Acer) has to find ways to differentiate the brand and stand out from the rest of the pack."