Days after Lenovo's US$1.75 billion acquisition
of IBM's personal-computer (PC) business hit the headlines,
the euphoria surrounding the deal is beginning to
evaporate as the larger implications of the deal begin
to sink in.
It is clear that even if it
was not the deal of the decade, it is the stuff
that case studies are made of. It is one of
China's largest acquisitions at this juncture. It will
make Lenovo, already China's largest and Asia's
leading computer maker, the world's third-largest producer of
PCs after Dell and Hewlett Packard (HP), with 8% of
the global market share. The deal has made it possible
for Lenovo to acquire a brand ranked the
world's third-most-valuable by BusinessWeek and Interbrand. It follows
a string of deals over the past two years that have
given Chinese companies control of South Korea's No 4
auto maker Ssangyong Motor, television brand RCA and
the Asian subsidiary of US phone giant Global
Crossing.
For IBM too, this is a
deal of significance as it gives Big Blue entry
into the burgeoning consumer markets of China even
while allowing it to take its laggard operations off its
books. The company's PC division was incurring about 2.7%
net losses. Lenovo, on its part, commanded 27% of China's
PC market share in 2003 and Lenovo PCs ranked No 1 in
the Asia-Pacific region (excluding Japan) with a share
of 12.6% in 2003. Upon acquisition, Lenovo's world
market share will rise to 8% in terms of shipment. As
former Lenovo Chairman Liu Chuanzhi said while announcing
the deal, "The purchase has changed the landscape of
the global PC-manufacturing business."
The deal is a
trail-blazer of sorts, for it establishes the Chinese
name quickly in the international arena. It is likely to
set off a spree of other such deals as other Chinese
companies that want to go global in the shortest period
of time try to emulate Lenovo's example - one reason why
this may not be the Chinese deal of the decade. It is
also likely to be the kind of textbook deal from which
Chinese acquirers will learn and improve their
cross-border acquisition skills.
At another
level, this deal is not merely about a Chinese company
acquiring a US brand name. It is more than that. It's
a major gain for China over the United States on the
geopolitical chessboard. It also marks the arrival of
the Chinese at the high end of the technology market -
more than a mere OEM (original equipment manufacturer)
capable of just fulfilling client specifications - as
acquirers and owners of technology. That makes this
foray not only an example of Lenovo's ambition, but also
of the vision of the Chinese government, which has been
encouraging its enterprises to go forth and multiply.
One needs to remember that it is about a Chinese firm
acquiring interests in an American company that
struggled and gave up, even though the former is not
necessarily in the best of financial health.
Goldman Sachs analyst Laura Conigliaro notes
in a research paper, "Judging from past
PC-related acquisitions, the acquiring company struggled
and typically ended up giving up market share. In
past mergers, such as Gateway Inc and eMachines Inc,
and HP-Compaq, the combined companies' market share
turned out to be less than (that of) the individual
merged companies." That raises questions why the stock
markets reacted the way they did to the acquisition. Stocks
of the Chinese computer maker rose by 6% on the
morning of December 9 - after trading had been suspended
for three days. But the prices fell by more than 10% by
the close of the day to HK$2.58 (US$0.33). Similarly,
IBM's stocks on the New York Stock Exchange closed
at US$96.65, an increase of 0.57%, on December 8 after
the deal was announced. The answer to this behavior lies
in the doubts that are now being raised by
international bankers and experts, who feel the road ahead may
be tough. As Alan Hsieh, president of US IT-market research
firm International Data Corp (Chinese mainland, Hong
Kong and Taiwan) told Xinhuanet, "Lenovo will have huge
challenges on the road ahead."
Jack Z
Chen, chairman, Asia-Pacific, of Barrington Associates and a
well-known takeover expert, told Asia Times Online,
"From a banker's standpoint, it's great because it
serves as a case study on a Chinese company buying a
piece of the most respected company in the world.
Encouraged by such a high-profile transaction, I believe
we'll start to see more and more such transactions -
that is, Chinese companies acquiring Western companies,
which own strong brands, customer base or distribution
channels. On the other hand, I am not sure how much good
this will do to the combined company."
The
deal After nearly 13 months of negotiation,
Lenovo paid $1.25 billion to acquire IBM's entire global
desktop and laptop computer research and development,
and manufacturing business. IBM, however, would hold on
to its services component. In late October, Lenovo
completed the sale of its services group to AsiaInfo.
About half of the acquisition price has been paid in
cash, the rest in stock. As a result of the deal, IBM
would now own 18.9% of the Hong Kong-listed Lenovo. The
deal price is being pegged at $1.75 billion because
Lenovo would also assume $500 million in debt.
The deal is expected to
be completed within the next six months. The
current Lenovo chief executive officer would become the
chairman, while the current general manager of IBM's
Personal Systems group would become the CEO, making an American the
CEO of the largest information-technology (IT) company in China. The
company's headquarters would move from Beijing to Manhattan,
though the operations headquarters would move from
Raleigh, North Carolina, to Beijing. Lenovo would pick up
IBM research-and-development (R&D) centers in Japan and the
Research Triangle in North Carolina along with most of a
manufacturing joint venture it already has with IBM in
Shenzhen, southern China. Lenovo also retains IBM's
sales staff.
But nobody is certain which way the
systems integrators and value-added resellers will go.
Some experts feel that Lenovo's new PC business would
benefit from IBM's worldwide distribution and sales
network covering 160 countries. Others see a trend
similar to the one set by Japanese companies in the
1980s when they went on an acquisition binge. Many,
however, say it is too early to reach conclusions and
more such acquisitions would have to be seen before such
conclusions can be drawn. The Chinese have been crowing
about the size of the deal as well as the globalization
of China, but competitors HP and Dell are complacent. As
Zeng Jiabao, vice president of HPPC China, commented:
"HP's PC business accounted for 15% of the global market
share in the third quarter this year. This is larger
then the world's third, fourth, and fifth PC makers'
shares combined. So the Lenovo-IBM deal won't have much
impact on our business."
The importance of the
deal can be gauged from the reactions it has drawn from
different commentators. The People's Daily viewed it in
terms of size. "The transaction volume worth $1.25
billion is a new record high for purchasing overseas IT
enterprises by Chinese enterprises," it said. The Los
Angles Times quoted Donald Straszheim, chairman of the
Los Angeles-based Straszheim Global Advisors, which has
offices in Beijing and Shenzhen, as saying, "It's a
clear indication that one of the things China is buying
is expertise. China knows that it don't know how to run
a company like this."
The New York Times dubbed
it as "a bridge between cultures," while the Taipei
Times concentrated on the competition. "Asustek has an
advantage in the clone market, where it gained a
foothold in motherboard business, to sell its brand-name
laptops," said Frank Chi, an analyst with Grand Cathay
Securities. The reference to the Taiwanese Asustek stems
from the assessment that Lenovo would face stiff
competition not only from Dell, Founder and TongFang,
but also from the Taiwanese company. Chi's assessment
was that Lenovo may lose out in the clone market but
that it stands a better chance of successfully competing
in a commodity market, which is something that IBM
simply did not want to and could not do.
The
concerns Both IBM and Lenovo have made several
statements after the acquisition, but they have also
expressed concerns. Talking to the media on December 16,
announcing IBM and China Great Wall Computer Shenzhen Co
Ltd's agreement to establish a new joint venture to
produce computer servers for Asia, IBM China chairman
Henry Chow said, "In unloading its personal computer
business to Lenovo Group, IBM managed to keep the
division's most profitable pieces - services and
support. In the coming 20 years, we will see IBM and
China's IT industry playing major roles in the
international market. We hope Lenovo can save our costs
by improving efficiency."
Independently, Lenovo
has not concealed its worries over the merger. "IBM is
too much concerned with big-scale clients and fails to
cover small- or medium-sized customers, which are the
core target consumer groups in running a PC business,"
said new chairman Yang Yuanqing. Lenovo has made it
clear that it plans to integrate IBM PC business' supply
chain as an effort to cut costs. "One year later, Lenovo
will unite the two companies' marketing and distribution
sectors as its second integration step and after that,
Lenovo will march into the international market with a
totally integrated image," Yang said.
Explained
Jack Z Chen of Barrington Associates, "Lenovo is not the
lowest cost producer in the PC industry, nor is it the
most efficient. Most PC manufacturers have already been
making PCs or components in Asia. As such, lower
production cost could not be the consideration of this
transaction. IBM's PC unit was a weak player compared to
Dell or HP, so there was no superior technology to talk
about. This transaction seems more like a big gamble by
Lenovo, which was losing market share in China and could
not find a way to turn around the company."
Chen
cites HP's acquisition of Compaq to elaborate his point.
"We know how hard it is to consolidate two companies'
operations after such a transaction. With Lenovo buying
IBM's PC unit, we have to deal with additional issues.
These include among others different cultures (not
simply corporate culture) and operating environments."
Though Lenovo was ranked high on the rung of PC makers
prior to the acquisition, its markets were largely
limited to China, with a few PCs being sold in Europe.
Following the acquisition, the new entity would have to
satisfy the needs of a highly complex international
consumer segment.
Said S S Rao, a longtime
ThinkPad user and fan, "The hardware itself may not be a
problem since Lenovo is acquiring IBM technology.
However, I am not so sure about technical support."
Columnist Michael Kanellos, CNet News.com's editor at
large, questions in the same vein, "How comfortable are
business customers going to be with a joint venture
owned mostly by a company based 10 time zones away? More
likely, they'd rather call Round Rock, Texas, home of
Dell. In addition, IBM will likely be uneasy about
having its brand name coming out of a group it does not
fully control."
This raises the tricky human
resource issues. Lenovo is a Chinese company, where a
mandatory break for exercise at noon is part of the
corporate culture. Expat Americans working with IBM have
tended to describe the acquisition among themselves as a
"Niagara Falls of tears". The cultural differences
apart, this staff would have to draw Chinese salaries in
the new company as Lenovo imposes "local hire"
conditions on them in place of the dollar salaries they
were drawing till now. This staff also cannot apply for
IBM jobs since they are banned from doing so under the
terms of the sell-off agreement.
Jayanthi
Iyengar is a senior
business journalist from India who writes on a range of
subjects for several publications in Asia, Britain and
the United States. She may be contacted at jayanthiiyengar1@hotmail.com.
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