Date
23 October 2017

Lenovo has larger gameplan in Motorola deal

Lenovo Group’s (00992.HK) decision to buy Motorola Mobility from Google Inc. has received the cold shoulder from the market. Investors appear have some concerns about the US$2.9 billion deal, which is understandable, but taking all factors into account it must be said that a quick judgment is unfair.

Chief executive Yang Yuanqing {楊元慶} had expressed interest in acquiring Motorola even before Google purchased the business in 2011. But the unrealized goal at that time has actually turned out to be a good thing for Lenovo. Why? Because Google has slimmed Motorola down in the past couple of years, offering a chance for Lenovo to grab what it wants at a much cheaper price.

Google acquired Motorola Mobility for US$12.5 billion three years ago. It then sold Motorola’s cable television set-top box business for US$2.35 billion, and also got rid of some factories and slashed the workforce of Motorola.

But the business kept losing money. In the third quarter of 2013, Google booked a net profit of US$2.97 billion but its Motorola business had a loss of US$248 million; it was the only business of Google that recorded a loss. Since Google’s purchase of Motorola Mobility, the total loss from the business has reached around US$1 billion.

So, what is Lenovo actually buying now? The deal will bring Lenovo 3,500 Motorola Mobility employees, 2000 patents, the brand name and trademark, according to a statement.

As Motorola Mobility has close relationship with more than 50 mobile carriers and retailers in America, Lenovo has made it clear that it could enter North America and Latin America markets swiftly through the acquisition.

Investors however do not seem to share Yang’s optimism. Lenovo shares tumbled over 8 percent on Jan. 30, the last trading day before the market closed for Chinese New Year holidays. The counter lost another 14 percent Tuesday morning as the market reopened in Hong Kong.

After making two major acquisitions—IBM’s server business and Motorola — within a month, total cash payment for the two deals is around US$2.73 billion. One key concern is the financial pressure that could arise due to the acquisitions.

Some investors are also worried that Motorola may not bring much to Lenovo. Motorola’s market share in the United States has been sliding in recent years. As of the third quarter last year, it accounted for just 7 percent of the total smartphone sales in that country.

Lenovo only gets 10 percent of Motorola’s patents from Google. That will be far from enough in giving the Chinese firm the muscle to fight the patent wars in the Western world. However, Google will hold 5 percent Lenovo stake after the deal is completed. Instead of an all cash deal, the stake-holding agreement implies that the two have a chance to join hands in the future.

Of course, it will be a big challenge for Lenovo to turn Motorola from loss to profit. But Yang is confident about the prospects. Pointing out that Motorola Mobility has a high gross profit margin, he has indicated that Lenovo will be able to turn around the business in due course.

– Contact the writer at [email protected]

RC

 

EJ Insight writer

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