Lenovo prides itself on being a modern multinational, but its approach to divulging information remains frustratingly old school.
Lenovo, based in China, is buying Google’s Motorola phone business just a week after it announced a deal for IBM’s low-end server unit. Adding the two unprofitable businesses to its portfolio will cost up to $5.2 billion in cash and stock. Though there is some strategic logic, shareholders have little way of working out whether the deals stack up.
The Motorola deal is the most recent case in point. The largest-ever technology acquisition by a Chinese company involves Lenovo making an upfront payment of $660 million in cash and shares worth $750 million. The remaining $1.5 billion is in the form of a promissory note to be paid out three years from the closing date - as long as undisclosed terms are fulfilled. In return, Lenovo gets an orphan mobile phone maker with a shrinking market share that has accumulated pretax losses of more than $2 billion over the last two years.
Little wonder that investors, who wiped 8 percent off Lenovo’s market value on the news, are nervous. It is only a week since the company bought IBM’s low-end server unit with equally scant detail about how it might restore the business to profitability. Lenovo is effectively asking its shareholders to rely on its track record in turning around ailing companies - a reputation it established by buying IBM’s personal computer business in 2005.
The Motorola deal appears to be driven mainly by the desire to diversify. Though Lenovo is the world’s No. 3 smartphone vendor by units sold, after Samsung and Apple, it sells 97 percent of its phones in China, according to Gartner. Motorola’s relationships with carriers - and its brand - could give Lenovo a boost in the United States.
Yet Lenovo’s history is no guarantee of success. Fixing Motorola requires it to appeal to fickle Western consumers rather than selling to business customers.
Both recent purchases require approval from the Committee on Foreign Investment in the United States. Two prominent deals could make Lenovo a target for politicians eager to stir up fears about Chinese acquisitions. But if Lenovo gets the green light, it will take more than vague promises to persuade investors that its M.&A. spree makes sense.
Ethan Bilby is a columnist for Reuters Breakingviews and Peter Thal Larsen is Asia Editor. For more independent commentary and analysis, visit breakingviews.com.
