Lenovo CEO Reshapes Chinese PC Maker With Deal Spree
Yang Yuanqing is showing his global ambition.
In the span of a week, the chief executive officer of China’s Lenovo Group Ltd. (992) cut the two biggest deals in his company’s history. He’s spending a combined $5 billion to buy Google Inc. (GOOG)’s Motorola mobile-phone business and International Business Machines Corp. (IBM)’s low-end server business.
It’s a risky bid to use acquisitions to move beyond the shrinking personal-computer business and become a broader technology player. Yang is betting that moving aggressively into North America will help give him the scale to better compete against Apple Inc. (AAPL) and Samsung Electronics Co. in smartphones and against Dell Inc. and Hewlett-Packard Co. in servers.
“We dream to become a global player,” Yang said in an interview. “You must be a global player to have global presence. Only being in China and emerging markets is not enough.”
Investors panned the Motorola purchase yesterday, driving down Lenovo’s shares the most in 19 months. Alberto Moel, an analyst at Sanford C. Bernstein & Co. in Hong Kong, said the company may be overpaying for a company struggling to compete against Apple and Samsung.
Lenovo essentially negotiated a layaway plan for acquiring Motorola, with the sale including $1.41 billion in cash and Lenovo stock paid at the close of the deal, and $1.5 billion to be paid in a three-year promissory note, Mountain View, California-based Google said in a statement dated Jan. 29.
On Jan. 23, Lenovo agreed to buy IBM’s low-end server business for $2.3 billion, including about $2 billion of cash and the rest coming in shares of Beijing-based Lenovo, the companies said.
Yang has a history of proving his critics wrong. When he bought IBM’s PC unit for $1.25 billion in 2005, skeptics said North America was too risky for a Chinese company and that Lenovo’s purchase would undermine IBM’s ThinkPad brand. Instead, Yang used the deal to transform his company into the world’s biggest PC maker, leaving once-powerful competitors like Dell behind.
“There are a lot of parallels here,” said Frank Gillett, an analyst at Forrester Research. “Lenovo was strong in its home country in PCs, but the IBM buy gave them a global brand and a lot of access. In buying Motorola, they are buying a major brand, and a company that has established relationships with carriers.”
The Motorola deal, which creates the world’s No. 3 smartphone vendor, is Yang’s latest attempt to take an iconic business and restore it to glory.
When Lenovo paid $1.25 billion, excluding debt, for the IBM PC unit in 2005, the business hadn’t made a profit for 3 1/2 years.
Yang used the deal to vault Lenovo five places to No. 3 in the world before expanding his range with faster, lighter and more durable machines. Lenovo reached No. 1 last year and the company is expected to post record profit in 2014.
“We’ve had successful acquisitions, and we believe one plus one equals four,” Gerry Smith, president of Lenovo’s North America operations, said in an interview at the World Economic Forum in Davos.
The company lifted its profile by placing products in movies such as “Transformers: Dark of the Moon” and hiring celebrity endorsers including actor Ashton Kutcher and basketball star Kobe Bryant.
Yang will have a similar task ahead of him with Motorola. The company’s third-quarter sales fell by about a third, even as it released Moto X, the first smartphone introduced under the direction of Google’s leadership.
Lenovo had 4.7 percent of the global smartphone market in the third quarter, IDC said in October. Motorola accounted for just 1.7 percent of shipments in that period, according to Strategy Analytics.
“We expect Yang can turn this into a profitable company in two years’ time,” said Ricky Lai, a Hong Kong-based analyst at Guotai Junan Securities. “Yang has a very good track record of acquiring non-profitable businesses and turning them to profit.”
Not all investors agreed. Lenovo fell 8.2 percent to close at HK$10.06 in Hong Kong trading yesterday, the biggest one-day drop since June 21, 2012. It’s gained 25 percent over 12 months, compared with the benchmark Hang Seng Index’s 7.1 percent slide. The company’s U.S.-listed shares declined 3.5 percent to $26.90.
The proposed transactions may trigger a U.S. security review, similar to what happened with the IBM deal in 2005. That could slow or even scuttle the purchases as growing Chinese investment in the U.S. has prompted national-security concerns.
The deal is the latest evolution for the company that began in 1984 as a PC distributor called New Technology Developer Inc. Liu Chuanzhi founded the business with $25,000 in capital after teaming with 10 colleagues from the Chinese Academy of Sciences.
The Academy, a government institution, owns some of the company through its stake in Legend Holdings Ltd., which in turn is Lenovo’s largest shareholder with a stake of about 32 percent, according to data compiled by Bloomberg.
In 2009 the Academy completed the sale of a 29 percent holding in Legend, where Liu is chairman, in a move that still left it as the biggest investor in the Beijing-based company with a 36 percent stake.
Lenovo’s growth in its home market have been underpinned by Chinese government procurement policies that encourage buying domestic products.
As the company expanded beyond China, it made changes to smooth the transition. Liu, a former chairman, required all staff to learn English after the IBM deal to help its global expansion. Yang hired a tutor and watched 24-hour international news channels to become more conversant in English.
Yang’s deals, and the company’s own expansion, are about tapping growth in new markets and making Lenovo less reliant on a PC industry coming off its worst year ever.
Lenovo’s smartphone and tablet computer businesses have been built from the ground up to complement the PC business that has been its mainstay for about two decades.
The company’s present course of diversifying with mobile devices was charted by Yang in consultation with Liu, who returned to the company in 2009 to help steer it through the global recession before stepping down in 2011.
“Liu Chuanzhi came back and, within three years, turned Lenovo around through restructuring its PC business and starting the handset business again,” said Jun Zhang, an analyst with Wedge Partners Corp. “Yang is a good CEO and executes well the strategy that Liu Chuanzhi made.”
Motorola fits a similar mold to the IBM PC business. The Chicago-based company produced the world’s first commercial handheld mobile phone and led the analog market before being eclipsed as consumers switched to digital and then smartphones.
The business has been shrinking and struggling to keep up with Samsung, which used Google’s Android operating system to become the world’s biggest smartphone maker.
“Do not underestimate Lenovo,” said Mark A. Moskowitz, an analyst with JPMorgan Chase & Co. “Lenovo could replicate their success in PCs, particularly at the low end of smartphones.”
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