A bold acquisition of an iconic US brand that will cap Lenovo’s rise to the ranks of global technology leaders?
Or a deal too far that will cripple the Chinese company’s finances without making an appreciable dent in the mobile markets that have come to dominate the personal technology world?
The news that Lenovo had agreed to acquire the Motorola handset business from Google for $2.9bn drew sharply different reactions after the announcement early on Thursday morning in Beijing.
Coming hot on the heels of its $2.3bn deal to buy part of IBM’s server business, it capped a week of deal-making designed to accelerate the transformation of the world’s biggest PC maker into a broad-based tech manufacturer.
To its supporters, the latest deal promises to turn the company from a struggling producer in the cut-throat Chinese smartphone market, where it has been outflanked by Samsung, into a global maker of prestige handsets that command premium prices.
That makes it a close parallel to the earlier deal that first put the Chinese company on the world stage: its 2005 purchase of the IBM PC business, which brought it a globally-recognised brand and launched it on a consolidation drive that took it to a market leading position in PCs – even if that has resulted so far in negligible profits.
Lenovo’s leaders are clearly hoping that buying a venerable US brand in mobile will have the same transformative impact on its business as its earlier acquisition in computing.
Lenovo is the number two smartphone seller in China, one of the most competitive smartphone market in the world, selling roughly 40m handsets last year, along with another 10m mainly in emerging markets. Smartphones account for 15 per cent of its revenues but make a negligible contribution to profits, analysts say.
Adding the Motorola business will open the door to the more profitable – though mature – US market while giving it a strong development team and products to take on a global market, said Frank Gillett, an analyst at Forrester Research.
Penetrating the US market is a priority for Lenovo, according to Wong Waiming, the company’s chief financial officer, who said Motorola’s portfolio of US patents was especially attractive feature of the acquisition. Lenovo will assume 2,000 patents and receive a licence to other Google smartphone intellectual property.
Currently the number three smartphone seller in the world, mainly on the back of the huge Chinese market, it is set to become number three after its acquisition of Motorola from Google, Lenovo executives said.
Yet it will still have a long way to go to separate itself from the pack of also-rans to become a true rival to Apple and Samsung. The deal will only lift its share of the market by a percentage point, to about 6 per cent, according to Lenovo’s own reckoning.
The benefits from the deal could extend further than just the smartphone market, according to supporters. As the maker of wider range of handsets, tablets and PCs – as well as the servers that make up the back-end of the “cloud” – Lenovo stands to become of the only tech companies to sell a full range of hardware, said Mr Gillett said.
That should give it an edge in a converging market where the distinctions between different computing devices are starting to blur and where there will a competitive advantage in offering buyers a full range, he added.
Others are less enthusiastic. Rather than vaulting ahead of its struggling PC industry rivals, Lenovo is about to saddle itself with a heavily loss-making business that will take “billions of dollars” to rebuild, said Alberto Moel, an analyst at Bernstein Research.
The $1.5bn promissory note it has promised to issue to Google as part-payment for the deal will squeeze the company’s financial flexibility, even before it faces the steep costs of investing to revive the business, he said.
Also, inheriting Motorola’s steep losses ($645m in the first nine months of last year, on revenues of $3.2bn) – on top of IBM’s industry-standard server business – threatens to put paid to hopes among investors that Lenovo was set on progressively adding to its narrow profit margins. “The idea of the earnings escalator has just gone out the window,” said Moel.
Yet in spite of a challenging set of foreign acquisitions this month, Mr Wong said Lenovo wasn’t ruling anything out for the future as it moves further onto the global stage.
“From the standpoint of finances, we definitely have the capability of doing more [acquisitions]. But from the integration perspective we are looking to have some successes before we look at further deals.”
Additional reporting by Sarah Mishkin
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