Lenovo Working With Multiple Agencies on IBM, Motorola

Lenovo Group Ltd. (992) said more negotiations are required with multiple U.S. government agencies as the Chinese company seeks approval for more than $5 billion in planned acquisitions.

Lenovo still believes it can close the $2.3 billion purchase of International Business Machines Corp. (IBM)’s low-end server unit and the $2.91 billion purchase of Google Inc. (GOOG)’s Motorola Mobility unit this year as planned, Chief Executive Officer Yang Yuanqing said in a phone interview today.

“We are making progress, but we definitely still have some things to do with multiple government agencies,” Yang said without elaborating on the remaining issues.

The IBM deal was expected to spark a close review partly because U.S. agencies, including the Defense Department and the Department of Homeland Security, buy the IBM servers, according to Bloomberg Intelligence. Lenovo and IBM, seeking more time for a U.S. national-security review, in June resubmitted the deal for examination by an interagency panel, a person familiar with the matter said at the time.

“The IBM and Motorola deals are important for Lenovo, especially for growth beyond fiscal 2016,” said Stephen Yang, a Hong Kong-based analyst at Sun Hung Kai Financial. “All parties are hoping for calendar year-end closure, but there is always a risk that regulators could stretch it out.”

CFIUS Review

The Committee on Foreign Investment in the U.S. examines acquisitions of U.S. companies by foreign investors to determine the effects on national security, with a standard inquiry taking 75 days. Lenovo said in June the companies were still on track to complete the deal by year’s end.

Lenovo was successful in getting CFIUS approval in 2005 for an earlier deal, in which the Chinese company acquired IBM’s personal-computer unit for $1.25 billion.

Review of the latest IBM purchase, which was announced in January, comes amid heightened tension between the U.S. and China over cybersecurity. In May, the U.S. accused five Chinese military officials of stealing trade secrets and other information from American companies.

The server purchase would add a business with wider profit margins than PCs and give Lenovo about 14 percent of that market, the company has said. The Motorola deal would add an established mobile phone brand in developed markets, including the U.S.

“With the Motorola deal, we will become a global player in the smartphone area,” Yang said in the interview today. “The IBM deal is equally important to our enterprise business or even more important because that gives us a very strong foundation, very strong customer base, very good technology and a good team.”

Profit Rise

Yang spoke today after the company reported net income surged 23 percent to $213.5 million in the three months ended June. That beat the $197.3 million average of eight analysts’ estimates compiled by Bloomberg.

Sales climbed to $10.4 billion in the period from $8.79 billion a year earlier, Lenovo said.

Yang has kept the company growing by winning market share in PCs as he expands the smartphone and tablet-computer businesses. Lenovo is moving beyond its home base of China by targeting growth in the Middle East, Africa and Latin America.

“Looks like strength everywhere -- their emerging markets business in both smartphones and PCs seemed relatively strong,” said Alberto Moel, an analyst at Sanford C. Bernstein & Co. in Hong Kong. “The PC contraction is now heading into the late stages, and Lenovo is driving the consolidation to its advantage.”

PC Share

Lenovo, which has its headquarters in Beijing and Morrisville, North Carolina, fell 1.4 percent in Hong Kong, while the benchmark Hang Seng Index declined 0.4 percent. The stock has gained 19 percent this year.

While industrywide global PC shipments gained 0.1 percent in the three months ended June, Lenovo posted a 15 percent increase, researcher Gartner Inc. reported last month. Global PC shipments are projected to decline 2.9 percent this year, following a 9.5 percent drop last year, according to Gartner.

Lenovo’s smartphone shipments jumped 39 percent in the period to 15.8 million units, researcher International Data Corp. reported last month. That lifted its global market share for the devices to 5.4 percent from 4.7 percent a year earlier, IDC said.

“The company beat estimates with strong product shipments as their PC sales outpaced the global average,” Ricky Lai, an analyst at Guotai Junan International Holdings Limited in Hong Kong, said by phone today after results. “The smartphone business is also showing very strong growth in the second quarter.”

Online Sales

Lenovo passed Samsung Electronics Co. (005930) as China’s smartphone market leader for the first time, Yang said, citing data from IDC. Still, increased competition from domestic peers including Xiaomi Corp. and Huawei Technologies Co. are increasing competition in China.

Lenovo will adopt more of the online distribution strategy favored by Xiaomi, using Lenovo’s websites and e-commerce platforms run by JD.com Inc. and Alibaba Group Holding Ltd. (BABA), Yang said.

“China is a very chaotic market and the top three are very close,” Yang said in the interview. “The current competitive situation is hard for everyone to make money. For mobile phones, our focus is outside of China, particularly emerging markets.”

Lenovo ranks No. 4 globally in smartphone shipments, behind Samsung, Apple Inc. and Huawei, respectively, IDC said. Lenovo will look to Southeast Asia, Eastern Europe and Latin America for growth, Yang said in the interview.

“Lenovo is doing very well on the mobile side,” Jean-Louis Lafayeedney, an analyst at JI Asia in Hong Kong, said before the results were announced. “They have a rapidly growing business in terms of sales, although it’s still not growing as much in terms of profit.”

To contact Bloomberg News staff for this story: Edmond Lococo in Beijing at elococo@bloomberg.net

To contact the editors responsible for this story: Michael Tighe at mtighe4@bloomberg.net Robert Fenner, Aaron Clark

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