Wall Street Beat: Acer masters the Art of War

Acer executed a master stroke in the global war for PC market share with its US$710 million purchase of Gateway, but it may take a while for the market to see the light.

Industry researchers view the deal as a long-term positive, saying it not only strengthens Acer's ability to challenge Hewlett-Packard and Dell for U.S. market share, but that it also blocked a potent rival, Lenovo Group, from gaining ground in Europe.

Even Sun-tzu, the ancient Chinese war strategist who wrote "The Art of War," could not have achieved a better move, wrote J.P. Gownder, consumer PC analyst at Forrester Research, in a report. "Acer strategists calculated several moves ahead in the global PC chess game. If the execution is solid, this deal will create a powerful third-place PC competitor that will challenge HP and Dell by 2009, and portends the rise of non-Japanese Asian PC superpowers," he wrote.

But in the near term, stock market analysts and investors couldn't have disagreed more. Almost in unison, they criticized the deal as too expensive, too complex and unnecessary for Acer's growth.

"The premium paid to Gateway may be too high, and the execution risk of a multiple-brand strategy is clearly the key here," said Vincent Chen, PC industry analyst at CLSA Asia-Pacific Markets in Taipei.

The negative comments hurt Acer's stock. The shares fell 10.6 percent this week to end at NT$57.9 (US$1.75) Friday on the Taiwan Stock Exchange.

But the view of the financial sector may be short sighted. Analysts at industry researchers such as Forrester, IDC and Current Analysis West take a longer-term perspective on the deal.

Acer and Gateway may lose some market share immediately following the merger, which is normal, according to Richard Shim, an analyst at IDC. But over the long term the deal will give it the size and clout to gain market share and source components.

"The opportunity for Acer in acquiring Gateway is the consumer market segment and particularly the retail channel," he wrote in a report. "The acquisition of Gateway will not necessarily position Acer to be a competitor on the level of Dell and HP but it lays the ground work for Acer to be a more significant player in the largest market in the world [the U.S.] and in the fastest growing segment of that market."

Current Analysis West analyst Toni Duboise believes Acer could triple its U.S. market share with the addition of Gateway-branded desktops and notebooks, and eMachines' value PCs.

The impact of the deal will take months, even years to ripple through the market, analysts say. Not only did Acer add significantly to its size, it also stopped Lenovo from increasing its presence in Europe. Lenovo had been in talks to buy Packard Bell, but by picking up Gateway, Acer was able to block the deal. Gateway held the right to refuse any deal to buy Packard Bell and make its own offer due to an older contract between the two companies.

Stock market analysts argue that buying Packard Bell is a waste of time for Acer because the company is already strong in Europe. But industry researchers, and Forrester in particular, argue the move staved off a Lenovo ploy that might have hurt Acer in Europe.

The IDG News Service is a Network World affiliate.