Lenovo punished by downgrades over Motorola Mobility acquisition deal

Technology giant's stock plunges 16pc following brokerage downgrades on concerns over profits

PUBLISHED : Wednesday, 05 February, 2014, 5:37am
UPDATED : Wednesday, 05 February, 2014, 4:52pm

Computer giant Lenovo, which announced US$5 billion worth of deals last month to bolster its server and smartphone businesses, saw its shares plunge the most in five years yesterday after the stock was downgraded by at least five brokerages.

Lenovo fell 16.4 per cent to close at HK$8.41 on the first day of trading of the Year of the Horse - marking its biggest decline since January 2009.

The world's biggest supplier of personal computers was downgraded by UBS, Morgan Stanley, Jefferies Group, JI-Asia Research and Kim Eng Securities.

Lenovo chief executive Yang Yuanqing announced his company's two biggest acquisitions last month as he seeks growth drivers to help weather a slump in global personal computer shipments.

The purchase of International Business Machines' low-end x86 server unit delivers corporate clients, while the follow-up deal for Google's Motorola Mobility mobile-phone unit was criticised for adding an unprofitable business with shrinking sales.

"We expect a negative impact on Lenovo's net profit - at least in the near term - from the acquisition of Motorola Mobility," Morgan Stanley analysts, led by Grace Chen, said in a report.

"It will take some time before Lenovo turns the business profitable."

The purchase of Motorola Mobility was "a necessary evil" to help Lenovo boost its presence in the United States and its patent portfolio, Arthur Hsieh, an analyst at UBS, said in a report released on Monday.

Still, Motorola Mobility was expected to lose money for the next three fiscal years, and that would weigh on Lenovo's earnings, Hsieh said in downgrading the shares to "neutral" and lowering the price forecast to HK$10.30 from HK$12.

"The potential uncertainty in the [Motorola Mobility] deal could offset the benefit from the IBM x86 deal," he said.

Lenovo agreed to pay US$2.3 billion for IBM's low-end server unit on January 23, adding a business with wider profit margins than personal computers and giving it about 14 per cent of the market.

The company then agreed to buy Motorola Mobility for US$2.91 billion in cash and stock, adding a brand established in the US mobile-phone market and creating the world's No 3 smartphone supplier.

The proposed transactions may trigger security reviews that could slow or even scuttle the deals as growing Chinese investment in the US has prompted national security concerns.

Motorola has reported falling sales as it lags behind Apple and Samsung Electronics in global smartphone shipments.

"Execution risk is high and increasing competition creates concerns," said Mark Po, an analyst at UOB-Kay Hian. "The integration of Motorola Mobility is likely to drag down overall profitability."

Lenovo had 18.1 per cent of the global personal computer market last year. US-based Hewlett-Packard was second with 16.4 per cent.

However, the personal computer market is coming off its worst year, with industry shipments dropping 10 per cent last year, according to research firm Gartner.