Gateway purchase boosts Acer
By Dave Dreeszen Journal business editor | Posted: Sunday, September 02, 2007
In 1971, a young Taiwanese electrical engineer commercially developed his country's first desktop calculator. A year later, Stan Shih led a team that designed the world's first pen watch.
At the time, on the opposite side of the globe, Ted Waitt was in grade school in Sioux City. Like Shih, Waitt developed an entrepreneurial spirit and a talent for tinkering with electronic components.
Both men built successful personal computer businesses, at a time when the industry was in its infancy, and then retired, turning their respective companies over to hand-picked successors.
In recent years, however, the fortunes of the two firms have taken sharply different turns. Acer Inc., the Taiwan-based firm Shih co-founded in 1976, has recreated itself from a contract manufacturer to the world's fastest-growing PC brand the last three years. Gateway Inc., which Waitt started in a Sioux City farmhouse at age 22 in 1985, has steadily lost U.S. market share due to fierce competition and a series of missteps.
With Gateway ripe for a takeover bid, Acer swooped in. Acer's $710 million acquisition of Gateway, announced last week, creates the world's third-largest PC company and gives the Taiwanese firm better access to the U.S. retail market, which it exited in the 1990s and only recently reentered.
Less uncertain is whether Acer will keep Gateway's sprawling complex in North Sioux City, which now employs about 950, down from a peak of almost 6,000 in the late 1990s, when it also housed the company's headquarters and main manufacturing plant.
In a conference call last week, Acer CEO J.T. Wang said there are no immediate plans to lay off any of Gateway's 1,645 employees, described as critical to the future success of the combined company.
Acer, which expects to save about $150 million annually through the merger, is working with Gateway management on an integration plan for all its U.S. facilities. It's expected to be complete by the close of the sale in December.
Though rumors of a Gateway sale had been swirling for months, little of the local speculation focused on Acer as a potential suitor, said Kory Menken, executive director of North Sioux City Economic Development Corp.
To be honest, this was out of the blue,'' Menken said. "Personally, I had never even heard of them before. The more research I do, I'm finding out they're a very solid company.''
Taiwan roots
Though little known in Gateway country, Acer, one of the oldest PC brands, is currently the No. 4 seller globally. The multi-national business traces its roots to Multitech, a Taiwanese electronics distributor that Shih and three other partners founded 31 years ago. In 1987, the Acer name was adopted.
Shih, considered one of the most influential non-Americans in the early days of the PC industry, built a brand, while also maintaining a contract manufacturing business that churned out computers for the likes of IBM and Compaq.
The Acer co-founder was among the first to recognize the potential of microprocessors, Intel Corp. CEO and President Paul S. Otellini said in a 2006 issue of Time magazine that celebrated "60 Years of Asian Heroes. "Shih saw how marrying cheap chips with efficient manufacturing could spread computing power to the masses,'' Otellini wrote in the magazine.
By the mid-1990s, Acer had grown into one the globe's top PC companies. But tough competition and an over-expansion into other IT businesses left the firm mired in financial troubles by the decade's end. That triggered a restructuring plan in 2000 that dismantled much of the company's empire.
Its contract manufacturing division was spun off into a separate business, Wistron, which is now one of the world's largest ODMs, or Original Design Manufacturers. Acer also shed its monitor and peripheral unit, which became BenQ, a firm, which, like Gateway, is now based in Irvine, Calif.
Shih retired in 2004, turning the reigns over to his former No. 2, Wang, who started his career with Acer in 1981.
Gains in U.S. market
Following the restructuring, the Acer brand roared back to life.
"They gradually started to build back their PC business,'' said Richard Shim, a technology analyst at IDC. "Over the last few years, they've gotten a lot of momentum in western Europe, which has allowed them to push their way into the top 10 in terms of market share for PC shipments.''
The fastest-growing PC maker for the past three years, Acer's global shipments grew by nearly 40 percent in 2006. The brand developed a loyal following for flashy products, like its Ferrari-black notebooks.
Acer, which outsources all of its computer production line, now employs about 5,300 people supporting dealers and distributors in more than 200 countries. The firm, which has its headquarters in Taipei, has thrived with a horizontal management structure. With fewer levels of management, the company believes it can react to changes in the marketplace more quickly, Shim said.
Since reentering the U.S. market two years ago, Acer's share of all PCs sold in the country grew to 5.2 percent in the second quarter of 2007, according to IDC. That narrowly trailed the 5.6 percent for Gateway, a distant No. 3 behind Dell and Hewlett-Packard.
Teaming with Gateway should help Acer grow its U.S. business much faster. The acquisition gives Acer better access to big-box retailers like Best Buy, Wal-Mart and Circuit City, said Rick Hanna, a Morningstar analyst who follows Gateway.
"What Acer really wanted was Gateway's retail distribution,'' Hanna said.
Acer plans to keep the Gateway brand and its black and white cow-spotted containers. In the 1990s, Gateway's marketing strategy emphasized Holsteins like those who grazed at Waitt's family farm. The cows became a symbol for the folksy, homegrown company, along with the charismatic, pony-tailed Waitt.
On the strength of its made-to-order direct sales model, Gateway quickly grew into a Fortune 500 firm. At its peak, the company grew 20 to 30 percent from quarter to quarter, making it the Acer of its day. Since the dot.com bust, the company has struggled with declining sales, a revolving door of senior managers and a series of missteps, including the ill-fated opening of its own branded stores and a money-losing focus on consumer electronics.
While its days as a stand-alone company are nearly over, Gateway maintains a small loyal following -- a commodity that Acer intends to build on, IDC's Shim said.
"Gateway is still a very strong brand,'' he said. "In combination with their brand and their retail partnerships, they are still a valuable company.''
Hanna said Acer shows less interest in Gateway's direct sales and professional divisions, which are the poorest performing segments of its business. About 20 minutes before Acer announced its deal for Gateway in the wee hours of last Monday morning, Gateway announced it is in talks with a third party to sell its professional division, which focuses on business, education and government customers.
Gateway's professional and direct sales divisions, both based in North Sioux City, account for several hundred jobs each. The southeast South Dakota site also is home to several support functions, and a new 130-employee tech support center, which opened last year.
Battle with Lenova
After closing its transaction, Acer said it plans to sell multiple PC brands, including Gateway and possibly eMachines, a low-cost brand Gateway acquired in a separate deal three years ago, to increase sales. The Taiwan-based company forecasts combined annual revenues of $15 billion and shipments of nearly 20 million PCs, allowing it to easily leapfrog past its Chinese rival Lenova to become the world's third largest PC vendor.
The Gateway deal also could stymie Lenova's plans to grow in Europe. When Lap Shun John Hui, the former owner of eMachines, acquired Paris-based Packard Bell last year, he waived certain non-compete arrangements. That gave Gateway the first right of refusal to buy Packard Bell, which has strong sales in Europe. Lenova, which is much weaker in Europe than Acer, had been in negotiations to buy Packard Bell, but now Gateway plans to excercise its right to buy it.
"It's a strategic move,'' Shim said. "I'm sure it sweetened the pot.''
Smiling curve
In 1992, Acer Inc. co-founder Stan Shih unveiled his "Smiling Curve,'' a visionary business model for adding value in the IT-related manufacturing industry.
Today a blueprint for PC contract manufacturing, the theory views one end of the value chain as technology and patents, and the other as brands and service. The middle part, Shih said, represents assembly and manufacturing.
As each end of the chain commands higher values than the middle, companies should focus on bringing these ends upwards to boost profits.
The model gets its name from a resulting graph of that chain, which curves like a smile.
Dave Dreeszen
At the time, on the opposite side of the globe, Ted Waitt was in grade school in Sioux City. Like Shih, Waitt developed an entrepreneurial spirit and a talent for tinkering with electronic components.
Both men built successful personal computer businesses, at a time when the industry was in its infancy, and then retired, turning their respective companies over to hand-picked successors.
In recent years, however, the fortunes of the two firms have taken sharply different turns. Acer Inc., the Taiwan-based firm Shih co-founded in 1976, has recreated itself from a contract manufacturer to the world's fastest-growing PC brand the last three years. Gateway Inc., which Waitt started in a Sioux City farmhouse at age 22 in 1985, has steadily lost U.S. market share due to fierce competition and a series of missteps.
With Gateway ripe for a takeover bid, Acer swooped in. Acer's $710 million acquisition of Gateway, announced last week, creates the world's third-largest PC company and gives the Taiwanese firm better access to the U.S. retail market, which it exited in the 1990s and only recently reentered.
Less uncertain is whether Acer will keep Gateway's sprawling complex in North Sioux City, which now employs about 950, down from a peak of almost 6,000 in the late 1990s, when it also housed the company's headquarters and main manufacturing plant.
In a conference call last week, Acer CEO J.T. Wang said there are no immediate plans to lay off any of Gateway's 1,645 employees, described as critical to the future success of the combined company.
Acer, which expects to save about $150 million annually through the merger, is working with Gateway management on an integration plan for all its U.S. facilities. It's expected to be complete by the close of the sale in December.
Though rumors of a Gateway sale had been swirling for months, little of the local speculation focused on Acer as a potential suitor, said Kory Menken, executive director of North Sioux City Economic Development Corp.
To be honest, this was out of the blue,'' Menken said. "Personally, I had never even heard of them before. The more research I do, I'm finding out they're a very solid company.''
Taiwan roots
Though little known in Gateway country, Acer, one of the oldest PC brands, is currently the No. 4 seller globally. The multi-national business traces its roots to Multitech, a Taiwanese electronics distributor that Shih and three other partners founded 31 years ago. In 1987, the Acer name was adopted.
Shih, considered one of the most influential non-Americans in the early days of the PC industry, built a brand, while also maintaining a contract manufacturing business that churned out computers for the likes of IBM and Compaq.
The Acer co-founder was among the first to recognize the potential of microprocessors, Intel Corp. CEO and President Paul S. Otellini said in a 2006 issue of Time magazine that celebrated "60 Years of Asian Heroes. "Shih saw how marrying cheap chips with efficient manufacturing could spread computing power to the masses,'' Otellini wrote in the magazine.
By the mid-1990s, Acer had grown into one the globe's top PC companies. But tough competition and an over-expansion into other IT businesses left the firm mired in financial troubles by the decade's end. That triggered a restructuring plan in 2000 that dismantled much of the company's empire.
Its contract manufacturing division was spun off into a separate business, Wistron, which is now one of the world's largest ODMs, or Original Design Manufacturers. Acer also shed its monitor and peripheral unit, which became BenQ, a firm, which, like Gateway, is now based in Irvine, Calif.
Shih retired in 2004, turning the reigns over to his former No. 2, Wang, who started his career with Acer in 1981.
Gains in U.S. market
Following the restructuring, the Acer brand roared back to life.
"They gradually started to build back their PC business,'' said Richard Shim, a technology analyst at IDC. "Over the last few years, they've gotten a lot of momentum in western Europe, which has allowed them to push their way into the top 10 in terms of market share for PC shipments.''
The fastest-growing PC maker for the past three years, Acer's global shipments grew by nearly 40 percent in 2006. The brand developed a loyal following for flashy products, like its Ferrari-black notebooks.
Acer, which outsources all of its computer production line, now employs about 5,300 people supporting dealers and distributors in more than 200 countries. The firm, which has its headquarters in Taipei, has thrived with a horizontal management structure. With fewer levels of management, the company believes it can react to changes in the marketplace more quickly, Shim said.
Since reentering the U.S. market two years ago, Acer's share of all PCs sold in the country grew to 5.2 percent in the second quarter of 2007, according to IDC. That narrowly trailed the 5.6 percent for Gateway, a distant No. 3 behind Dell and Hewlett-Packard.
Teaming with Gateway should help Acer grow its U.S. business much faster. The acquisition gives Acer better access to big-box retailers like Best Buy, Wal-Mart and Circuit City, said Rick Hanna, a Morningstar analyst who follows Gateway.
"What Acer really wanted was Gateway's retail distribution,'' Hanna said.
Acer plans to keep the Gateway brand and its black and white cow-spotted containers. In the 1990s, Gateway's marketing strategy emphasized Holsteins like those who grazed at Waitt's family farm. The cows became a symbol for the folksy, homegrown company, along with the charismatic, pony-tailed Waitt.
On the strength of its made-to-order direct sales model, Gateway quickly grew into a Fortune 500 firm. At its peak, the company grew 20 to 30 percent from quarter to quarter, making it the Acer of its day. Since the dot.com bust, the company has struggled with declining sales, a revolving door of senior managers and a series of missteps, including the ill-fated opening of its own branded stores and a money-losing focus on consumer electronics.
While its days as a stand-alone company are nearly over, Gateway maintains a small loyal following -- a commodity that Acer intends to build on, IDC's Shim said.
"Gateway is still a very strong brand,'' he said. "In combination with their brand and their retail partnerships, they are still a valuable company.''
Hanna said Acer shows less interest in Gateway's direct sales and professional divisions, which are the poorest performing segments of its business. About 20 minutes before Acer announced its deal for Gateway in the wee hours of last Monday morning, Gateway announced it is in talks with a third party to sell its professional division, which focuses on business, education and government customers.
Gateway's professional and direct sales divisions, both based in North Sioux City, account for several hundred jobs each. The southeast South Dakota site also is home to several support functions, and a new 130-employee tech support center, which opened last year.
Battle with Lenova
After closing its transaction, Acer said it plans to sell multiple PC brands, including Gateway and possibly eMachines, a low-cost brand Gateway acquired in a separate deal three years ago, to increase sales. The Taiwan-based company forecasts combined annual revenues of $15 billion and shipments of nearly 20 million PCs, allowing it to easily leapfrog past its Chinese rival Lenova to become the world's third largest PC vendor.
The Gateway deal also could stymie Lenova's plans to grow in Europe. When Lap Shun John Hui, the former owner of eMachines, acquired Paris-based Packard Bell last year, he waived certain non-compete arrangements. That gave Gateway the first right of refusal to buy Packard Bell, which has strong sales in Europe. Lenova, which is much weaker in Europe than Acer, had been in negotiations to buy Packard Bell, but now Gateway plans to excercise its right to buy it.
"It's a strategic move,'' Shim said. "I'm sure it sweetened the pot.''
Smiling curve
In 1992, Acer Inc. co-founder Stan Shih unveiled his "Smiling Curve,'' a visionary business model for adding value in the IT-related manufacturing industry.
Today a blueprint for PC contract manufacturing, the theory views one end of the value chain as technology and patents, and the other as brands and service. The middle part, Shih said, represents assembly and manufacturing.
As each end of the chain commands higher values than the middle, companies should focus on bringing these ends upwards to boost profits.
The model gets its name from a resulting graph of that chain, which curves like a smile.
Dave Dreeszen
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Dan W wrote on Sep 2, 2007 9:29 AM: