| Overload or a case of acer in a hole? | Overload or a case of acer in a hole?
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First Published: Wed, Aug 29 2007. 12 20 AM IST
Updated: Wed, Aug 29 2007. 12 20 AM IST
Asia’s tech industry is starting to look like a closet packed with dusty computing brands. Taiwanese group Acer has agreed to pay $710 million, or $1.90 per share, for rival Gateway—which controls both the eMachines label and the first right to buy European computer maker Packard Bell.
Simultaneously, Gateway announced it would exercise its right of first refusal over the purchase of Netherlands-based computer maker Packard Bell. Gateway acquired the right when it bought the eMachines brand from investor Lap Shun (John) Hui.
While Acer hopes the deal will give it a leg-up on the competition, it’s difficult to extract much value from brands whose best days are past.
Acer thinks it can cut costs and use its newly acquired marques to expand US sales. If so, the acquisition would stack up. The group thinks it can cut $150 million worth of costs. The present value of these cuts, after taxes, is about $1 billion—or enough to entirely justify the purchase. And if Acer can sell more PCs in the US, its own margins and profits would rise, adding extra gravy for shareholders.
But Acer may have a difficult time in practice. Unlike a classic car brand, a PC brand doesn’t evoke favourable nostalgia. A 1930s Bugatti is instantly desirable. An early 1990s Packard Bell is taking up space in the basement and may evoke memories of technological aggravation. Gateway shares peaked at $83 per share in 1999.
Consider the experience of China’s Lenovo, which bought International Business Machines Corp.’s PC division. The merger was predicated on similar grounds—increased manufacturing efficiency and a beachhead for a quickly expanding Asian brand. Yet, after two rounds of cost cuts, its US operations are only slightly profitable with a 3% operating margin.
Moreover, the merger has proved distracting for management. Its combined global market share is now around 8%—about where IBM/Lenovo stood before the merger—despite a huge growth in Chinese PC purchases.
During the same period, Acer’s market share has nearly doubled to more than 7%. For a company that produces shiny new objects, Acer’s faith in the old and dusty looks odd.
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First Published: Wed, Aug 29 2007. 12 20 AM IST
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