Lenovo continues buying spree with $2.9bn Motorola deal

Lenovo buys lossmaking Motorola from Google, gaining a foothold into the handset market in the US and Latin America.

Lenovo, the world’s largest PC maker, continued its buying spree on Thursday, buying the Motorola handset business from Google for $2.9 billion. Less than a week ago, the Chinese company struck a deal to acquire IBM’s low end server unit for $2.3 billion.

The deal will enable Lenovo to jump into the US handset market, according to analysts, an area it lacks a presence in. It also transforms Lenovo into the third largest mobile maker in the world, after Apple and Samsung. 

Lenovo, which is better known for its laptops and PCs, has been trying to expand its product offering amid a sluggish PC market, and the acquisition of Motorola’s handset business enables it to do so, said a source familiar with the deal.

The group already has a smartphone business but primarily sells to China and other emerging market countries such as India and Russia.

“Lenovo was lacking a mobile distribution channel in the US and the acquisition allows it to tap Motorola's distribution channel without having to grow organically,” said Stephen Yang, a tech analyst at Sun Hung Kai Securities “In the US, 90% of all handset sales are through mobile carriers so, unless you have a strong retail network like Apple, it is difficult to tap the market," he added.

While the acquisition gives Lenovo an important foothold in developed markets - where it can sell smartphones at a higher margin - Motorola is at present heavily lossmaking. The unit posted an after tax net loss of $928 million during the financial year ended 2013, so clearly, the acquisition will not be earnings accretive.

Analysts are waiting for more details on why the unit has been posting such huge losses. “It isn’t clear why Motorola is losing so much. Google invested quite a bit in R&D in Motorola which may be causing the losses.” said Yang.

Google paid $12.5 billion to acquire Motorola in 2011 – mainly for the latter’s huge portfolio of patents, to defend the Android operating system against legal challenges from its rivals. Google will still maintain ownership of the vast majority of Motorola’s patent portfolio and will license patents to Lenovo.

Lenovo has a history of buying struggling businesses and making them more efficient – as it did when it bought IBM’s PC business in 2005 – and sources familiar with the deal say it could do the same with Motorola’s handset business.

“Google never bought Motorola to run it for profit; it bought it to defend the Android ecosystem,” said the source familiar with the deal. “It has since restructured the business, and Lenovo ought to be able to extract operational efficiency out of it,” he added. 

Based on a multiple to sales, Yang said the purchase looks reasonable. “Google paid about one-times sales, and Hewlett-Packard paid a similar multiple when it acquired Palm.  Lenovo is paying slightly under one-times sales, so from that metric the acquisition looks reasonable,” said Yang.

Judging by the stock's response, investors may have concerns over the company's buying spree. The stock had initially rallied in response to Lenovo's acquisition of IBM's server business and touched a 12-month high of HK$10.96 on Wednesday but its shares fell 8.2% to HK$10.06 in intraday trading on Thursday.

Lenovo will be funding the deal with $660 million of cash and $750 million of Lenovo shares and the remaining $1.5 billion through a three-year promissory note. The deal is pending approval from the Committee on Foreign Investment in the US, which could take six to nine months. Credit Suisse advised Lenovo on the deal.

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