Lenovo Group Ltd. (992) made the largest overseas technology acquisition by a Chinese firm this month when it acquired a server business from International Business Machines Corp. (IBM) Repeating the trick less than a week later took a little help from Google Inc. (GOOG)
Lenovo will pay about half of the $2.91 billion price of Google’s Motorola Mobility handset unit only three years after the deal closes, the companies said Jan. 29. The deferment was requested by Lenovo, and Google agreed in order ensure a deal could be struck before it reported its financial results yesterday, people with knowledge of the matter said.
“If you’re Google and you want to get out of this, then it’s probably the sweetener that gets the deal done,” said Brett McGonegal, the executive managing director of Hong Kong-based advisory firm Reorient Group Ltd. (376) “This is clearly a business that Google is trying to get out from.”
Lenovo sought the deferred payment while it was also closing in on the $2.3 billion acquisition of IBM’s low-end x86 server business announced on Jan. 23. The Motorola Mobility and server purchases now rank as the two largest overseas technology acquisitions by a Chinese company, according to data compiled by Bloomberg.
A spokesman for Lenovo declined to comment, while a spokesman for Google said the company isn’t commenting beyond what it’s already said about the deal.
In an interview, Lenovo Chief Executive Officer Yang Yuanqing 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 at his home 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.
Schmidt called Yang before the Thanksgiving holiday in November, Yang said. Negotiations over the handset business started in earnest at the start of this month, one person said, asking not to be identified because the information is private.
Lenovo, which has more than $3 billion of cash on its balance sheet according to Chief Financial Officer Wong Wai Ming, has avoided paying cash upfront by offering stock to both IBM and Google as part of the purchases. The total cash outlay for both purchases will be about $2.8 billion, Wong said on a conference call.
Lenovo will pay Google $660 million in cash and about $750 million worth of its stock, in addition to the $1.5 billion that’s due three years after the closing. Google will own between 4.6 percent to 5.6 percent of Lenovo after the deal closes, depending on the share price, according to a Lenovo filing in Hong Kong.
Lenovo considered the Motorola handset business with its Android operating platform and U.S. brand recognition to be a better fit for the company than rival smartphone maker BlackBerry Ltd., said a person familiar with the matter. CFO Wong said in January last year Lenovo was considering a possible deal with Waterloo, Canada-based BlackBerry before the manufacturer tried to sell itself.
Lenovo, which is licensing Motorola’s intellectual property, got the deal it wanted, Yang said.
“We don’t want to have too many girlfriends,” he said.
While Google wasn’t pressured into selling Motorola by competitors that use Android such as Samsung Electronics Co. Ltd, the Mountain View, California-based company’s management believed Lenovo had a better chance to improve the brand than keeping the unit in-house, according to a person familiar with the matter.
Google will retain a research and development business unit within Motorola that may contribute technology to smartphones in future years, said the person, in addition to almost all of Motorola’s patents.
Google rose 2.6 percent to $1135.39 in New York yesterday, before it posted fourth-quarter sales that topped estimates as retailers spent more on advertising during the holidays, making up for lower ad prices. Lenovo fell 8.2 percent in Hong Kong yesterday, its biggest drop since June 2012.
Lenovo expects a far lighter level of regulatory scrutiny from the U.S. government than for its purchase of the IBM server unit, people familiar with the matter said.
Google will receive a higher-than-average reverse breakup fee if the Motorola deal falls through, two people said, though it is not as high as the fee it has agreed to pay IBM. The Chinese company agreed to pay IBM a reverse breakup fee of 8 percent to 9 percent of the purchase price, said a person with knowledge of the matter, compared with a typical fee of about 3.5 percent, data compiled by Bloomberg show.
For Lenovo, the challenge is now to convince investors that it can integrate two major purchases at almost the same time, Reorient’s McGonegal said.
“In the near term, there’s too much doubt,” McGonegal said. “Have they bitten off more than they can chew? And by the way this isn’t exactly a thriving business.”
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