Lenovo Group chairman and CEO Yang Yuanqing doesnt like being a laggard. Thats why personal computer giant Lenovo recently agreed to buy Motorola Mobility from Google for $2.9 billion and pay $2.3 billion for IBMs x86 server business. Awaiting regulatory approval, these U.S. purchases would make the Beijing- and Morrisville, North Carolinabased company the worlds third-largest smartphone maker and supplier of general-purpose servers. They would also eclipse any previous tech takeover by a Chinese company, including the $1.75 billion that Lenovo shelled out for IBMs struggling ThinkPad laptop business in 2005.
The deals come soon after Lenovo supplanted U.S. rival Hewlett-Packard in the second quarter of 2013 as the worlds No. 1 PC maker by units shipped. Its a force in smartphones and servers too but only in emerging markets such as China. Both acquisitions would strengthen Lenovo in the developed world. For example, it would gain access to the U.S. smartphone market, where Motorola still has cachet. We will immediately have the opportunity to become a strong global player in the fast-growing mobile space, Yang, 49, tells Institutional Investor.
But some observers warn that the new additions are money losers that could drain Lenovos cash reserves, which stood at $3.4 billion last year. The IBM unit may boost fiscal 2014 revenue by 12 percent but slash net profit by 3.2 percent, notes Huang Leping, a Hong Kongbased technology analyst with Nomura Securities. The market isnt thrilled either: Lenovos American depositary receipts closed at $22.71 on February 14, an 18.5 percent drop from their 2014 high of $27.86.
Yang has proved that he can spin unwanted businesses into gold, though. When he led the ThinkPad takeover, analysts slammed that deal too. But Yang used it to transform Lenovo into a top international PC brand: Between fiscal 2005 and 2013, revenue grew 12-fold, from $2.8 billion to $34 billion. I am confident we will be successful with this process and that our companies will not only maintain our current momentum in the market but also build a strong foundation for the future, he says.