Which Way for Acer, Gateway?

Few were surprised when Taiwanese computer maker Acer Inc. said last month it plans to buy Gateway Inc.

But now some are wondering whether the struggling Irvine-based company’s brand name,along with its famed spotted cow motif,will have staying power under Acer.

Acer has a handful of deals that could serve as models,good and bad,for its integration of Gateway:

– The 1996 buy of Packard Bell Electronics Inc. by Japan’s NEC Corp.

– The 1997 buy of Irvine’s AST Research Inc. by Samsung Corp. of South Korea.

– And the 2005 buy of IBM Corp.’s PC business by China’s Lenovo Group Ltd.

Another example for Acer,minus the Asian buyer,is Hewlett-Packard Co.’s 2001 buy of Compaq Computer Corp.

So far, Lenovo’s buy of IBM’s business is the model for Asian companies looking to crack the market here, even though Lenovo wasn’t able to keep Big Blue’s name on its computers.

In the other deals,AST and Packard Bell,the Asian buyers had little luck and ended up ditching the dying brands (though Packard Bell still exists in Europe; see story this page).

With Acer’s $710 million deal, it is getting Gateway’s name and shelf space in big U.S. stores, such as Best Buy.

Acer has said it plans to keep the Gateway name on computers sold here.

“What Acer is doing is being definitive by saying, ‘We are sticking with the brand,'” said Richard Shim, an analyst in San Mateo for market researcher IDC Corp. “It’s a good choice to make those decisions early, because branding can really slow you down.”

After a lot of initial fanfare, Samsung dropped AST’s name a few years after the deal was closed.

“The problem with AST was that there wasn’t a lot of focus,” Shim said. “Neither brand was particularly strong.”

At the time, Samsung was known as an electronics maker and parts supplier, according to Safi Qureshey, an AST cofounder and chief executive at the time of the deal.

“PCs were a different business for Samsung,” he said. “They were trying to establish themselves in new markets in North America, China and other places.”

Acer could do well with the Gateway brand here, according to Qureshey.

“Acer has become a very strong brand worldwide,” he said. “Taiwanese companies working in the U.S. today have a much greater understanding of business culture and communication.”

Stephen Baker, analyst at market researcher NDP Group Inc., is more critical. The Gateway buy reminds him of AST and Packard Bell, he said.

“Those brands were on the market because they were on the decline,” he said. “They were focused on pieces of the consumer retail market that were struggling at the time. The (Asian) companies basically got brand names really cheap.”

Ten years after the Samsung and NEC deals were struck, the PC market is concentrated in the hands of HP, Dell Inc. and Lenovo, Baker said.

“The consumer now is the engine that drives the PC market, but it’s a little late in the game for anybody to try to get into it,” he said. “It’s tough in terms of margins and sales costs.”

Acer has its strong points.

It already is competitive in other countries, with 20% of the market for laptops in Europe, the Middle East and Africa, according to Acer’s Web site.

“Acer has momentum,” IDC’s Shim said. “They have a model that’s working in a climate where it’s difficult to establish one. They are also not totally dependent on the U.S., so they’ve got a little time.”

Keeping the Gateway name stands to give Acer a leg up with U.S. computer buyers, according to Shim.

The brand “is familiar and well-established,” he said. “Brand equity is certainly an elusive thing. It takes a huge amount of resources to build up a brand name.”

Gateway’s name has been its most important asset, even as it lost market share to Dell, HP and Lenovo. The company also has eMachines, the discount PC maker it bought in 2004. The deal led to Gateway’s move from San Diego to Irvine.

Acer wants to build on the brands with a new sales strategy, where it will market different computers to different buyers.

Gateway is set to be Acer’s premium brand for consumers, while eMachines will continue as a low-price brand. Acer’s own name will be on lower-end PCs and desktops sold to businesses, an area where Gateway had little success.

The model is “a must” to compete with Dell and HP, according to NDP’s Baker.

“To get enough scale, it has always been a business that requires you to sell to enterprises, consumers and small and medium businesses,” he said. “One of the things the HP-Compaq merger has shown is that there is room for a company that is able to manage multiple name plates.”

The biggest mistake Acer could make with the brand is not spending enough on marketing, according to Baker.

“One of the things they have to recognize is that while the PC market is cutthroat, it is also consolidated,” he said. “The way to grow the business is through marketing and sales and not by driving pricing down. That’s not a sustainable strategy.”

Turning around Gateway’s fortunes won’t be easy, IDC’s Shim said.

For one, Acer will have to compete for shelf space with HP and Toshiba Corp., which has its U.S. base in Irvine.

“To a large degree, that’s what Acer is buying, the retailers and distribution channel,” Shim said.

And Acer will have to “get away from that sense that the (Gateway) brand represents a risky proposition for consumers,” he said. “It will be a tricky minefield, but Acer has some of the right parts.”

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Then There’s Packard Bell

Acer Inc.’s pending buy of Gateway Inc. has a subplot with a little global intrigue.

The deal includes provisions to buy Packard Bell BV, the Netherlands-based PC maker owned by Orange County businessman Lap-Shun “John” Hui.

The strategic buy is designed to keep rival Lenovo Group Ltd. from buying Packard Bell as a way to gain entry into Europe.

Lenovo was said to be close to bidding for the company before Gateway exercised an option to buy Packard-Bell from Hui, who sold eMachines to Gateway in 2004 for $290 million.

Hui, once Gateway’s second largest shareholder after founder Ted Waitt, sold his stake to buy Packard Bell last year. To do so, he struck a deal with Gateway to get out of a noncompete pact by giving Gateway the right of first refusal to buy any of his companies before selling to a rival.

So now Acer is set to pay for Packard Bell, though it’s technically being bought by Gateway.

,Sarah Tolkoff