Lenovo M&A addiction targets Sharp

PUBLISHED : Friday, 18 January, 2013, 3:49pm
UPDATED : Friday, 18 January, 2013, 3:50pm

Despite his recent promises that he wouldn't pursue any new major M&A, Lenovo (0992.HK) chief Yang Yuanqing appears to be addicted to purchasing global assets, as reflected by the latest news that he is exploring a potential new tie-up with struggling Japanese electronics maker Sharp (Tokyo: 6753). I've previously said that Yang's addiction to M&A will result in some major challenges for Lenovo in the next few years, as it faces the difficult task of integrating various recently acquired assets in such diverse markets as Japan, Brazil and Germany.

I'll repeat that message once more with the latest reports that Lenovo is in late-stage talks for a deal that would see it take over operations of Sharp's factory making LCD televisions in the Chinese city of Nanjing. (English article) As part of the deal, Lenovo would also promote Sharp's Aquos brand TVs in China, and could eventually extend that to other markets like Southeast Asia.

This deal looks a lot like a previous one nearly 2 years ago that saw Lenovo take over the PC-making operations of Japan's NEC (Tokyo: 6701) with a similar joint venture. Lenovo paid for most of its stake in that venture by giving shares to NEC, and NEC later ended up selling most of those shares to raise desperately needed cash.

This latest deal would presumably see Lenovo give similar shares to Sharp as its stake in a new joint venture, which would then become the official operator of Sharp's LCD television factory in Nanjing. Both deals would follow the similar pattern of seeing the Japanese partner trying to get rid of a struggling asset by putting it into a joint venture, and then quietly exiting the business altogether a few years later by selling out its stake to Lenovo.

In my view, this latest deal with Sharp looks slightly better for Lenovo than the NEC deal, largely because the Sharp factory is actually located in China rather than Japan. But that said, this latest deal follows a similar pattern that Chinese companies have pursued in their global M&A, which usually sees them purchase struggling assets from a major western firm with an aim to engineering a turnaround. That strategy has failed most of the time, though it's always possible it could succeed in 1 or 2 cases.

In this particular case, Lenovo probably thinks it has better chances for success not only because the factory is located in its home China market, but also because the LCD TVs would complement its recent move into Internet TV. That move is part of a strategy that Lenovo and some other PC makers are following, which has seen them take a more integrated approach by entering related product areas such as smartphones and TVs as the distinctions between such products begin to blur.

I have no objections to that kind of approach, though it is worth noting that major PC makers like HP (NYSE: HP) and Dell (Nasdaq: DELL) have decided to remain focused on the computer business. Most importantly, I think that any new joint venture between Lenovo and Sharp would become yet another big distraction for Lenovo as it tries to integrate its NEC joint venture, as well as other recent purchases in Brazil and Germany.

Yang previously said he wouldn't pursue anymore major M&A after his Brazil purchase, and I think he should honour his word. But it seems like this opportunity for a joint venture with Sharp may be too tempting for him to resist, with the result that Lenovo could soon make yet another purchase that will ultimately lead to big headaches for the company 1-3 years down the road due to integration issues.

Bottom line: Lenovo's pursuit of an LCD TV joint venture with Sharp is its latest effort at global M&A, which is likely to create headaches for the company in the next 1-3 years due to integration issues.