Lenovo, SMIC in China-style divorces
New stake sales by NEC in Lenovo and TSMC in SMIC mark the first step toward an eventual divorce, driven partly by disappointment by the foreign partners in each marriage.
Their relatively low costs and access to the fast-growing China market often make major Chinese tech firms look like attractive business partners to their foreign peers. But big hopes for new partnerships often end in disappointment, resulting in the kinds of divorce we are now witnessing in the new slow-motion break-ups between PC giant Lenovo (0992.HK) and Japan's NEC (Tokyo: 6701); and between global contract chip-making leader TSMC (Taipei: 2330; NYSE: TSM) and Chinese counterpart SMIC (0981.HK, NYSE: SMI). In both cases, the foreign companies have just started selling down previous strategic stakes in their Chinese partners, in what's likely to end in an outright divorce for each pairing.
Let's look at Lenovo and NEC first, which announced last July that they would pool their Japanese assets into a joint venture that would be run by Lenovo. Just over a year later, Lenovo is saying it has agreed to let NEC sell the 281 million Lenovo shares it received as part of the joint venture deal before the end of a previously agreed 2-year lock up period.
Other media are reporting that NEC will sell its shares immediately, raising around US$235 million. NEC is selling the stock at HK$6.30 to HK$6.50 per share, representing a nice 40 percent premium over the price Lenovo was trading at last year when the 2 companies signed their joint venture deal.
This sale is also interesting from an investor perspective, since it provides a valuation of the joint venture at around US$500 million -- a key piece of information for the future date when Lenovo is likely to buy out NEC's 49 percent stake in the joint venture completely. I predicted just last week that the final break-up of this joint venture could come in the next 3-4 years, but this latest development indicates that it could perhaps come much sooner as NEC looks to exit the PC business.
Meantime, let's take a look at SMIC which has disclosed that TSMC has begun selling down its stake in China's largest contract chip maker. According to a filing with the Hong Kong Stock Exchange, TSMC recently sold down its SMIC holdings to 7.63 percent, reducing it from a previous 8.22 percent.
Longtime followers of these 2 companies will recall that TSMC agreed to take a stake of up to 10 percent in SMIC as part of a bigger 2009 settlement between the 2 sides related to a patent infringement lawsuit filed by TSMC against SMIC. Similar to the case with Lenovo and NEC, I expect this sell-down by TSMC is probably just the prelude to an eventual complete divorce between the 2 companies that will see TSMC sell its entire stake.
Investors who may have had high hopes for the 2 tie-ups seemed to sense the coming divorce in both cases, with Lenovo and SMIC shares both down around 7 percent when Wednesday trading began in Hong Kong. While this kind of divorce is a bit disappointing, I will add that it's not completely unexpected.
NEC probably never intended for its marriage with Lenovo to last forever, and saw it instead as a way to exit the low-margin PC business. Likewise, TSMC probably didn't hold very big hopes for the SMIC tie-up, which was just part of a much bigger settlement deal. At the end of the day, these break-ups reflect the broader reality that Chinese tech firms are often good at low cost manufacturing, but otherwise often prove to be disappointing business partners for their foreign peers.
Bottom line: New stake sales by NEC in Lenovo and TSMC in SMIC mark the first step toward an eventual divorce, driven partly by disappointment by the foreign partners in each marriage.