Lenovo Group Ltd. (992) agreed to buy Google Inc. (GOOG)’s Motorola Mobility phone unit for $2.91 billion, as the world’s largest personal-computer maker continues a buying spree of U.S. technology businesses. Lenovo fell 8 percent.
The sale includes $1.41 billion in cash and Lenovo stock paid at the close of the deal, with $1.5 billion to be paid in a three-year promissory note, Google said in a statement yesterday. Google will retain a majority of Motorola Mobility’s patent portfolio, with Lenovo receiving a license to the intellectual property.
“This fits perfectly with the strategy we have pursued for a couple of years,” Yang Yuanqing, chairman and chief executive officer of Lenovo, said in an interview. “Before, we only had PCs as a core business. Now, we’ve built two pillars: the first is enterprise, and the second is this mobile business.”
Investors punished Yang’s move, driving down the stock the most in 19 months on concerns Lenovo may have paid too much for a shrinking business. Motorola has reported falling sales as it lags behind Apple Inc. and Samsung Electronics Co. in smartphone shipments. The proposed deal would create the world’s third-largest smartphone vendor.
“This time Lenovo may have jumped the shark,” Alberto Moel, an analyst at Sanford C. Bernstein & Co. in Hong Kong, said by e-mail. He called Motorola “that faded gem of the early wireless era.” Moel rates Lenovo outperform.
Shares of Lenovo fell as some analysts panned the move, saying it would drain the company’s cash reserves. Lenovo fell 8.2 percent in Hong Kong, its biggest drop since June 2012. The stock has gained 6.7 percent this year, compared with a 5.5 percent decline in the benchmark Hang Seng index.
Lenovo has been looking to counter falling worldwide PC industry shipments by expanding into storage equipment, the servers that run corporate networks, and mobile phones. Buying Motorola would give Lenovo a stronger presence in the mobile-phone market in the U.S. and Western Europe.
The Motorola deal follows Lenovo’s agreement to purchase International Business Machines Corp. (IBM)’s low-end x86 server unit for $2.3 billion earlier this month. In 2005, Lenovo also acquired IBM’s PC division.
Lenovo is the fifth-largest smartphone vendor globally with a range of inexpensive devices and has begun to expand into premium devices in a bid to challenge Samsung Electronics Co. and Apple Inc.
A sale lets Google shed a hardware business it acquired as part of a $12.4 billion deal in 2012. The purchase pushed the Mountain View, California-based Internet search company into hardware and gave Google ownership of 17,000 patents to protect devices running its Android mobile operating system in legal disputes with competitors.
While the $2.91 billion sale of Motorola is a far cry from the price Google paid for the business, the world’s largest search company doesn’t appear to be taking much of a loss, analysts said.
After closing the agreement in 2012, Google got the unit’s $2.9 billion in cash. Google last year also sold Motorola’s set-top box business to Arris Group Inc. for $2.24 billion. And Google keeps the majority of Motorola’s patents, which it can license.
“It’s probably not as bad as it first appears,” said Aaron Kessler, an analyst with Raymond James & Associates, who rates Google the equivalent of a buy.
While Google has invested in Motorola, the unit’s revenue has declined. Motorola’s third-quarter sales fell by about a third, even as the company released Moto X, the first smartphone introduced under the direction of Google’s leadership. In November, Google announced it was rolling out a new lower-cost smartphone called the Moto G. Google reports fourth-quarter results tomorrow.
The deal will create the world’s No. 3 smartphone vendor with about 6 percent of the global market, trailing only Samsung and Apple, according to Strategy Analytics.
“Lenovo now has extra scale in smartphones and a seat near the top table,” Neil Mawston, an analyst at Strategy Analytics, said in a blog posting. “However, whether Lenovo can turn around the long-struggling Motorola business, and what happens to the Motorola brand long-term, remain key questions that will need to be answered in the coming months.”
Motorola’s patents have also shown signs that they weren’t a bargain. Google has lost patent cases or was delivered disappointing sums in cases that involved some of the intellectual property. Google had estimated in regulatory filings that $5.5 billion of the purchase price for Motorola was for patents and developed technology.
“This move will enable Google to devote our energy to driving innovation across the Android ecosystem, for the benefit of smartphone users everywhere,” said Google CEO Larry Page in a statement about selling Motorola to Lenovo.
Selling Motorola also lets Google resolve concerns among its Android hardware partners that it was putting devices made by Motorola ahead of those made by other companies, Kessler said. Now Google doesn’t have to compete with those partners, he said.
“It’s a positive Google is getting out of hardware,” Kessler said.
The deal comes two days after Google signed a patent-licensing agreement with Samsung to share their technologies. The agreement covers existing patents and those filed during the next 10 years.
In an interview, Lenovo CEO Yang said the company has long been interested in Motorola, including competing with Google to buy the business in 2011. When Lenovo lost out, Yang said he had Google Chairman Eric Schmidt over for dinner in Beijing. Over the meal, Yang said he told Schmidt that if Google ever wanted to sell Motorola’s hardware business, Lenovo would be interested.
Yang said Schmidt called him in November and the acquisition came together in two months.
“They’re not afraid of going out there and acquiring brands, especially to help them grow internationally,” said Andrew Costello, an analyst with IBB Consulting.
Google was advised by Lazard Ltd. while Credit Suisse Group AG was an adviser to Lenovo.
Yang also said in a conference call that he has no plans for layoffs after the deal and will keep a main hub of the phone maker in Chicago. As of Sept. 30, Motorola had 4,259 employees.
Lenovo will continue using the Motorola brand in the U.S. and Latin America and is considering the use of the name in China, Yang said. The company will gain scale and cost advantages from Motorola and plans to sell 100 million smartphones in the year after the deal, he said.
“We can not only turn around the Motorola business but further grow in this market,” Yang said during the call. “Motorola and Lenovo are competitive in different areas. When the deal closes, we will leverage all the capabilities of each side.”
The top five global smartphone vendors in 2013 by IDC’s rankings were Samsung with a 31.3 percent market share of shipments; Apple with 15.3 percent; Huawei Technologies Co. with 4.9 percent; LG Electronics Inc. with 4.8 percent; and Lenovo with 4.5 percent.
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