updated 8/27/2007 6:00:01 PM ET 2007-08-27T22:00:01

Taiwan-based Acer Inc. will acquire Gateway Inc. for $710 million in a deal designed to give the long-struggling U.S. computer maker the size it needs to compete against larger players, the companies announced Monday.

The deal will push the combined company past China’s Lenovo Group Ltd. to become the world’s third-largest vendor of personal computers, behind Hewlett-Packard Co. and Dell Inc.

With the acquisition, Acer will absorb a company that made a splash when it was founded in 1985 in an Iowa farmhouse.

Gateway’s made-to-order philosophy for selling computers made it a formidable player early on, and the brand became known for the cow-spotted boxes used to ship its products.

Now based in Irvine, Gateway struggled in recent years amid fierce competition.

It branched out into consumer electronics — selling televisions, music players and other items — but the strategy didn’t work. Neither did its retail stores, which shuttered in 2004.

“Having tried for several years to grow their way back up through various strategies, it seems a reasonable step to consider joining forces with another company,” said Tom Smith, a computer hardware analyst with Standard & Poor’s Equity Research.

Acer said it was offering to buy Gateway for $1.90 a share — representing a premium of 57 percent to Gateway’s Friday closing price of $1.21 but only 2 percent of Gateway’s all-time high of $82.50 in late 1999.

Gateway shares climbed 61 cents, or about 50 percent, to $1.82 Monday.

“Joining with Acer will enable us to bring even more value to the consumer segments we serve and capitalize on Acer’s highly regarded supply chain operations and global reach,” Gateway Chief Executive Ed Coleman said in a joint statement by the two companies.

Acer and Gateway have discussed merging in the past but intensified those talks during the past six weeks, Acer Chairman J.T. Wang said during a conference call with analysts.

Acer estimated that acquiring Gateway would create operating savings of more than $150 million a year and immediately add to its earnings.

Gateway also said it is in talks to sell its professional business, which markets computers to business customers, and is exercising its right to purchase the remaining shares of the parent company of Packard Bell BV, a European PC vendor based in France.

Smith said selling the professional unit makes sense for Gateway so it can focus on gaining share in just one market.

Acer is committed to buying Gateway whether the company succeeds in selling its professional division or not, Wang said.

Gateway gained the right to buy Packard Bell when it acquired eMachines for $235 million in cash and stock in 2004 from Lap Shun Hui, who now owns all the shares of PB Holding Co., the parent company of Packard Bell.

In 2006, Gateway rejected Hui’s offer to buy Gateway’s consumer business for $450 million.

Previously, Packard Bell had said it was in exclusive talks with Lenovo. Gateway’s move to buy Packard Bell was seen by analysts as a move to keep the company out of Lenovo’s hands.

The Acer-Gateway deal will create a multibranded computer company with more than $15 billion in revenue and shipments in excess of 20 million units per year, Acer said in a statement.

“This will be an excellent addition to Acer’s already strong positions in Europe and Asia,” Wang said in the statement.

Acer President Gianfranco Lanci said the acquisition will allow Acer to implement an “effective multibrand strategy and cover all the major market segments.”

The takeover will result in reductions in per unit procurement and component costs while creating opportunities for the cross-selling of product portfolios, he added.

In the second quarter, Acer was the world’s fourth-largest PC maker behind top-ranked Hewlett-Packard, No. 2 Dell, and third-ranked Lenovo, according to research company Gartner Inc.

Gateway is the third-largest PC vendor in the U.S. by market share after Hewlett-Packard and Dell.

Citigroup Inc. is the financial adviser for Acer, while Goldman Sachs Group Inc. is acting as the financial adviser for Gateway.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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