Taiwan's Acer buy's America's Gateway for $710 million

Acer announces it will acquire Gateway, the fourth largest PC company in the US, growing its revenues by around one third via the deal.
TaiwanÆs Acer will acquire currently loss-making Gateway, the fourth largest personal computer company in the US and a leading retail PC provider, for an equity value of $710 million. The combine will be a multi-branded PC company with over $15 billion in revenues.

Via a cash tender offer Acer will offer for all the outstanding shares of Gateway for $1.90 per share, aggregating $710 million. The offer price represents a 57% premium to the prevailing share price of Gateway, which closed around $1.21 levels on August 24.

The deal will include Gateway's right of first refusal to acquire Packard Bell in Europe although details of how this will work are not immediately available. (Lenovo announced earlier this month that it was pursuing Packard Bell.)

AcerÆs 2006 revenues were $11.32 billion. Gateway revenues for 2006 were $3.98 billion. Acer is growing revenues by 35% via the deal. At $710 million, Acer is paying a revenue multiple of around 0.18 times.

GatewayÆs operating loss for calendar 2006 was $18.9 million, up from $0.6 million in 2005.

Stock market commentary blog, seekingalpha had commented back in April: ôGateway should be sold to a strategic acquirer as soon as possible as the company has failed to create value for shareholders, which is evidenced by the companyÆs depressed stock price.ö The blog went on to comment that ôthree positive developments make the business attractive to a strategic buyer: (1) award-winning North America-based tech support, (2) notebook and display sales growth in 2006 and (3) new product launches by Gateway in 2006ö.

The combination of Acer and Gateway is expected to benefit from both revenue and cost synergies - with the benefit of increased scale, the companies are confident of lower per unit procurement and component costs. The companies also plan to leverage the acquisition to cross-sell to existing customers of both companies.

"The acquisition of Gateway and its strong brand immediately completes Acer's global footprint, by strengthening our US presence,ö says JT Wang, chairman of Acer in a written statement. ôThis will be an excellent addition to Acer's positions in Europe and Asia. Upon acquiring Gateway, we will further solidify our position as number three PC vendor globally."

Wang highlighted what some specialists see as the biggest value addition for Acer via the transaction - a platform on which to grow its presence in the US. In its transaction briefing after the announcement, Acer executives further highlighted this aspect of the deal.

AcerÆs announcement of the Gateway acquisition on August 27 coincided with its announcement of half year results for 2007. Acer grew profit after tax 7.6% year-on-year to NT$7.65 billion ($233.54 million), up from NT$7.1 billion, translating to an earnings per share (EPS) of NT$3.23, up from NT$3.09 for the previous year.

Acer shares lost a shade under 2% on the Taiwan bourse to close at NT$63.6. Some analysts said the nervousness reflected concerns on potential integration issues of the US target into Acer.

Gateway markets a range of computers and related products and services under two brand names, Gateway and eMachines. It primarily operates in the US. Gateway was advised on the sell side by Goldman Sachs.

Acer is a leading branded vendor of mobile and desktop PCs, servers and storage, LCD monitors and high-definition TVs, projectors, and handheld/navigational devices. It supports dealers and distributors in more than 100 countries.

Rumours that Acer is interested in acquiring California-based Gateway have been doing the rounds since early this year although Gateway has consistently denied these.

Pre-tax synergies of the deal are expected to be around $150 million. Acer said the transaction would be accretive to its earnings per share in 2008 without synergies. The acquisition is expected to close by December 2007.

Neither Acer nor Gateway responded to requests for comments.

Citi, which advised Acer on this deal, has announced in fairly quick succession buy side advisory roles on three Taiwan-centric deals û CVC on its $549 million delisting bid for Taiwanese curtain-maker Nien Made, Lite-On on its $379 million acquisition of Perlos, Finland and now on this $710 million deal. (For the sake of comparison, all numbers are equity values.) Citi is clearly cementing its position in what many bankers have predicted will be one of the most active Asia markets for both financial sponsors and M&A this year and next.
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