Lenovo's ambitious smartphone, server deals fraught with challenges

Hard on the heels of its IBM server purchase, Lenovo's Motorola Mobility acquisition presents daunting integration challenges, say analysts

PUBLISHED : Monday, 03 February, 2014, 4:11am
UPDATED : Monday, 03 February, 2014, 6:11am

After landing its biggest-ever corporate acquisition, computer giant Lenovo faces the daunting task of swiftly integrating and turning around the fortunes of Motorola Mobility's loss-making smartphone business, while also merging the low-end server division of International Business Machines.

Lenovo, the world's largest supplier of personal computers, announced last Thursday it had agreed to acquire Motorola Mobility from Google for US$2.91 billion, which followed the company's deal to buy IBM's commodity server business for US$2.3 billion on January 23.

Those two United States-based acquisitions, which are both subject to regulatory approvals, would transform Lenovo, respectively, into the world's third-biggest smartphone maker and third-largest supplier of so-called x86 general-purpose servers used by companies and inside data centres.

Despite the optimism expressed by Lenovo's senior management about simultaneously absorbing two major operations, analysts see the road to integration being fraught with tough challenges.

Alberto Moel, a senior analyst at Bernstein Research, said on Thursday: "At this point, we believe Lenovo may have bitten off more than it can chew."

"The investment in manpower, financial resources, and care and feeding required to make Motorola Mobility a success seems high," Moel said. Those factors may also be a concern for the IBM server deal, but Moel pointed out there was "much to like" in that enterprise-focused business.

He added that IBM's x86 server division has also been operating at a loss, but it "could become a new profit pool [for Lenovo] even if the margin expansion is modest". Bernstein Research earlier estimated that the IBM business could add US$4 billion to US$5 billion to Lenovo's annual revenue.

Lenovo, which has about 48,000 employees worldwide, is expected to add about 3,500 staff from Motorola Mobility and 7,500 from the x86 server division of IBM.

Ezra Gottheil, a principal analyst at Technology Business Research (TBR), said the Motorola Mobility and IBM x86 server acquisitions "almost completely exhaust Lenovo's cash reserves".

"Under Google's management Motorola was unable to stop its tailspin, and lost nearly US$1.3 billion in operating income in 2013," TBR analyst Jack Narcotta said. "The Motorola business, even with Google's help, was clearly struggling."

Gottheil added: "Motorola Mobility will suffer several quarters of losses, while Lenovo streamlines its operations and drives increased sales. Change takes time."

Lenovo, helped by strong demand in its core China market, was the world's fifth-biggest supplier of smartphones last year, according to technology research firm IDC. On the mainland, Lenovo is the No 2 smartphone brand behind overall industry leader Samsung Electronics.

In a telephone interview last week, Lenovo chief financial officer Wong Wai-ming said he was well-aware of the concerns about the two big acquisitions, but maintained confidence in the company's track record in mergers.

"From an overall integration perspective, we can leverage our experience to make Motorola Mobility a very successful acquisition," Wong told the South China Morning Post. "We will roll out a thorough execution plan, like what we did in integrating IBM's PC division, the NEC venture in Japan, Medion in Europe and CCE in Brazil."

Wong clarified that Lenovo, which is yet to report its fiscal third quarter to December, had about US$3 billion in cash at the end of last year. He also pointed out that the initial cash outlay for its two big acquisitions would be about US$2.73 billion.

In the IBM server deal, Lenovo agreed to pay US$2.07 billion in cash and US$230 million via a new share offering. The Motorola Mobility transaction, meanwhile, included US$660 million in cash, US$750 million in Lenovo ordinary shares and a US$1.5 billion promissory note payable in three years.

"With more than US$3 billion in cash and our completed syndicated bank facilities, we are very comfortable and have tonnes of cash to support operations," Wong said.

Gottheil said: "Wong is counting on synergies within Lenovo. He also believes that Lenovo's management process is more efficient than Motorola Mobility's." That would also apply to driving growth in IBM's x86 server business.