Gigabyte Spinoff with AsusTek Pre-empted Acquisition by Foxconn

There will be a new motherboard provider emerging this Thursday, complete with the brand name of one of the most respected suppliers in the industry. Gigabyte United officially comes online on December 7, as the joint venture of two of the enthusiast segment's most revered brands, Gigabyte and AsusTek.

The new name made the enthusiast press treat the news initially as a merger agreement, with Gigabyte the 51% controlling entity. But in an interview published over the weekend by the Indian technology supplier news provider DQ Channels, one of the new company's key marketing managers made it quite clear the two companies are not merging.

In fact, as regional marketing manager for Asia and Africa Tim Handley told the publication, Gigabyte was trying to avoid a hostile takeover from Taiwanese industry giant Foxconn Technologies. And as it turned out, AsusTek was only too happy to oblige.

"The reason was simple," said Handley. "Like most Taiwanese companies, Foxconn's business model was to simply manufacture motherboards in bulk to enjoy economies of scale. It did not have any need to market its brand or create its brand identity."

Foxconn didn't need or want to create a Foxconn brand for the enthusiast market - in fact, it might not have been too well received had it done so. A simple acquisition would have given the company a presence in the high end without the burden of having to actually build it. But Gigabyte suspected the result of such a move is that the bigger company's new high-end presence might end up languishing.

So AsusTek served as a white knight, helping Gigabyte set up a joint venture for the exclusive production of motherboards and graphics cards. The resulting venture would make the already big fish too big for Foxconn to swallow - at least this year.

But Handley also made it clear, the new venture would be openly competing with AsusTek and the Asus brand, and Gigabyte United will not be producing equipment under the Asus or AsusTek brands. But by Gigabyte partnering with AsusTek, he explained, both companies mutually benefit from being able to make bigger and better technology deals with Intel and AMD.

Such deals will be critical, he explained, to negotiating better prices with suppliers that will help both partners improve their margins. In 2005, Gigabyte's net operating margins fell below 5% on relatively brisk sales; for Asus, they managed to stay above 6%. But 2006 is proving to be an even tighter year for both partners.

So would a true merger of equals ever be in the works? No, says Handley, first because AsusTek has an established brand presence and an exclusive customer base (Asus attracts a more general audience, Gigabyte goes for the uber-performer); and secondly because a merged company would have to renegotiate its agreements with Intel and AMD, for technology that's coming down the pike from both companies only in the next few weeks.

But Handley did not rule out a merger between Gigabyte United and another party. "M&As are bound to happen," he said, "as and when the market demands it."