Lenovo to buy Acer?

Several times in the past, Acer has made moves that directly affected Lenovo's business. Could it be that, with all of the senior-level shake-ups at Acer, that Lenovo is ready to make its master-move?  KitGuru hears the rumours, does some digging and looks at the possibility that we're about to witness the birth of the world's largest PC manufacturer.

From its humble beginnings as the brainchild of Stan Shih and his wife Carolyn, Multitech grew from a handful of employees in 1976 and evolved into Acer with revenues of almost $20Bn in 2010.

Lenovo is an ambitious company. While its posted revenues are more than $3Bn lower than Acer's, the company has grown differently and now has reported assets of almost $9Bn with over $1.6Bn in equity. That's in the wake of its takeover of IBM's PC division in 2005 and its more recent partnership announcement with NEC in January 2011.

OK, so both companies are huge and well-established. Why the rumours about a takeover?

Acer has been built on growth. Rapid expansion has been the order of the day and, until recently, every financial report seemed even more glowing than the previous one. A continuous cycle of re-investment in product and aggressive sales tactics, meant that Acer was able to climb to the top of the tree in shipment terms.

Another key element the company's success was its ability to control costs and run with the lightest possible management structure. In many cases, Acer would have a cost advantage over rivals like HP, by up to 10%.

In a head-to-head bidding situation, for major orders, Acer could go in at 10% below HP and still make the same profit margin on the business (or 8% below – and be cheaper as well as more profitable).

When new technologies came to market, Acer was also able to deliver quickly. In plenty of cases, Acer's rivals could take 12 weeks from processor launch until the new product was in the stores. Acer was turning around the new technology in half that time. By the time rivals had launched, Acer had made its money and was ready to discount.

So what changed?

Well, if your company is built on (a) continuous expansion, (b) aggressive pricing and (c) time to market for new technology – then the things you don't want to see are :-

1. Flat market – with much less growth
2. Prices collapsing, so that your competitors are right on top of you and there is not enough space to differentiate
3. Slowdowns in the launch of new technologies, which extend the shelf life of existing chips

The rapid deceleration of the market in the wake of the global crisis in 2008 was rapidly followed by the launch of Apple’s iPad range. These two events have caused a huge challenge for Acer.

In terms of pricing, go into any branch of PC World and have a look at the laptops. There can be 50 offers in the £300 to £500 price range. Mathematically, if they were evenly spaced, that would mean a new offer every £4. It’s crazy to try and differentiate on price when the next model up or down is so close.

If you’re not sure about product slowdowns, then you were not watching the shelves in January. Intel’s new Sandy Bridge technology was sweeping all before it, but the chip giant only launched a handful of models and none of them were i3. Rumour has it that, as the world went into 2011, Acer was still trying to shift some of the stock it had bought in summer 2010.

In the past, Acer would have churned through stock – realised the money – and reinvested it into new ranges. Not so easy these days.

The last item of background you need to know, is the way that the media has spun the relationship between Lenovo and Acer. When Lenovo’s interest in acquiring the Gateway or Packard Bell brands surfaced, Acer moved in rapidly and secured the deals. Rightly or wrongly, many saw this as a deliberate effort by Acer to upset Lenovo’s plans.

At the same time as Acer was scooping up small, but important local brands – Lenovo was forming a partnership with Japanese superhero NEC.

OK. Enough background. What would the benefits be for Lenovo and Acer?

Lenovo is not only massive, it has a huge amount of cash on hand, it has significant assets and – in the latest figures from industry analysts – it has broken into the world’s top 5 producers list with sales volumes up by more than 5%, while Acer had to give up its leadership spot to HP.

Acer has been fantastic at moving its products into the world’s top retail chains, while Lenovo has struggled in comparison.

So there you have the marriage.

Lenovo has the depth and backing, while Acer has the ‘whizz’ when it comes to marketing and running the channel.

If a deal could be done, then it would not only create the world’s number one vendor in an instant, it would give the new company (on paper at least) a lead of 25% over HP. You would have to imagine that, in the all important emerging markets, the new company would have a huge advantage.

In terms of who might run the combined company, it's probably worth noting that Acer's Wang thought buying IBM's PC brand was a bad idea and he believes that Apple sales will slump to less than 20% of the tablet market, while Lenovo's Yuanqing Yang is Forbes Asian Businessman of the Year. Who knows.

KitGuru says: Changes have already been made at the top of Acer in recent months, was that a prelude to bringing together two of the Far East’s biggest companies to form a mega-manufacturer?  Right now, this story is speculative, but KitGuru has spoken with 3 industry experts over the last 2 days – and they have all heard the same rumours. Is HP's worst nightmare about to come true?

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