China's Lenovo buys Google's Motorola business for US$2.9 billion
Observers hail the move as win-win, as Google gets to keep Motorola patents and Chinese firm can boost its brand recognition
Reuters in San Francisco
Lenovo Group said on Wednesday that it agreed to buy Google’s Motorola handset division for US$2.91 billion, in what is China’s largest-ever tech deal as Lenovo buys its way into a heavily competitive US handset market dominated by Apple.
It is Lenovo’s second major deal on US soil in a week as the Chinese electronics company angles to get a foothold in major global computing markets.
Lenovo last week said it would buy IBM’s low-end server business for US$2.3 billion. The deal ends Google’s short-lived foray into making consumer mobile devices and marks a pullback from its largest-ever acquisition.
Google paid US$12.5 billion for Motorola in 2012. Under this deal the search giant will keep the majority of Motorola’s mobile patents, numbering around 17,0000, which are considered its prize assets. While Google would be taking a loss on the sale, it did spin off the Motorola Home division for US$2.3 billion in 2012 and sold off some of its manufacturing facilities.
Even under Google, Motorola failed to gain traction in a rapidly evolving smartphone market now dominated by South Korea’s Samsung and US-based Apple.
“Lenovo has the expertise and track record to scale Motorola Mobility into a major player within the Android ecosystem,” Google chief executive Larry Page said in a statement.
Lenovo chairman and chief executive Yang Yuanqing said the acquisition “will immediately make Lenovo a strong global competitor in smartphones. We will immediately have the opportunity to become a strong global player in the fast-growing mobile space”.
Shares in Google climbed 2.2 per cent to about US$1,131 in after-hours trading. Reuters reported the deal earlier on Wednesday, citing sources familiar with the deal.
The purchase will give Lenovo a beach-head to compete against Apple and Samsung Electronics as well as increasingly aggressive Chinese smartphone makers in the highly lucrative US arena.
In 2005, Lenovo muscled its way into what was then the world’s largest PC market by buying IBM’s personal computer division. It has powered its way up the rankings of the global smartphone industry primarily through sales on its home turf but has considered a US foray of late.
“Using Motorola, just as Lenovo used the IBM ThinkPad brand, to gain quick credibility and access to desirable markets and build critical mass makes a lot of sense,” said Forrester Research analyst Frank Gillett.
“But Motorola has not been shooting the lights out with designs or sales volumes in smartphones. So the value is simply in brand recognition to achieve market recognition faster – and to expand the design and marketing team with talent experienced at US and Western markets,” Gillett said.
The deal is subject to approval by both US and Chinese authorities. Chinese companies faced the most scrutiny over their US acquisitions in 2012, according to a report issued in December by the Committee on Foreign Investment in the United States.
Analysts say political issues could cloud the deal, especially with Lenovo trying to seal the IBM deal at the same time. In the deal for the Motorola handset business, Lenovo will pay US$660 million in cash, US$750 million in Lenovo ordinary shares, and another US$1.5 billion in the form of a three-year promissory note, Lenovo and Google said in a joint statement.
“Google got what they wanted and needed from Moto – they got patents, engineering talent and mobile market device insight,” said technology analyst Jack Gold. “This is a win for Google and a win for Lenovo in my opinion.”
But analyst Ramon Llamas at research firm IDC said the deal still leaves a hole of about US$7 billion for Google. “Are the patents worth US$7 billion? I don’t know but that is a big question,” Llamas said.
In two years, China’s three biggest handset makers – Huawei, ZTE Corporation and Lenovo - have vaulted into the top ranks of global smartphone charts, helped in part by their huge domestic market and spurring talk of a new force in the smartphone wars.
Huawei declined to comment on the deal on Wednesday. In the United States, the Chinese companies continue to grapple with low brand awareness, perceptions of inferior quality and even security concerns. In the third quarter of last year, ZTE and Huawei accounted for 5.7 per cent and 3 per cent of all phones sold in the United States, respectively, trailing Apple’s 36.2 per cent and Samsung’s 32.5 per cent, according to research house IDC.
Lenovo had negligible market share. Globally, however, Lenovo ranked fifth last year with a 4.5 per cent market share, according to IDC. That is up from 3.3 per cent in 2012 and virtually nil a couple years before that.
Lenovo became best known in the United States after buying IBM’s PC business in 2005, and used that to become the world’s biggest PC maker last year.
Motorola is not among the top global smartphone makers but has around 7 per cent of the US market, according to analysts.
Meanwhile, Google has struggled to turn around loss-making Motorola. Now it is willing to step back from the hardware arena and throw its weight behind handset makers that propagate its Android software, Kantar analyst Carolina Milanesi said.
“It all points to Google thinking in the short run that they’re better off betting on Samsung and keeping them close,” Milanesi said. “And of course now they’re enabling a second strong runner [Lenovo] in the Android ecosystem.”
Analysts had seen Google’s Motorola acquisition as primarily a way to secure the company’s trove of patents amid the technology sector’s increasing legal battles. Many industry observers were surprised that Google did not immediately sell the hardware division after the deal closed, choosing instead to operate Motorola as a separate company.
It did sell Motorola’s cable television set-top box business to Arris Group for US$2.35 billion at the end of 2012. Lenovo is being advised by Credit Suisse Group while Lazard advised Google on the transaction, the sources said.
With additional reporting from AFP