Investors skeptical of Lenovo’s deal for Motorola smartphone business

dranii@newsobserver.comJanuary 31, 2014 

Lenovo’s $2.91 billion bet that it can turn around Motorola’s struggling smartphone business was greeted with initial skepticism by investors on Thursday.

The Chinese company’s stock-like American depositary receipts closed at $26.90, down 3 percent. In China, Lenovo’s stock dropped the most in 19 months on the news that the company has agreed to acquire Motorola Mobility from Google, Bloomberg News reported.

“For Lenovo, their goal was to have a way to enter the very competitive U.S. smartphone market,” said Hugues de la Vergne, an analyst with research firm Gartner. “This acquisition gets them to the table.”

Lenovo, which is based in China and has a headquarters in Morrisville, is the world’s No. 1 PC company and has been expanding into other devices, including smartphones and smart TVs. But although it quickly became the No. 2 smartphone maker in China and also sells smartphones in countries such as Russia and India, its phones aren’t sold in the U.S. market.

“People that would look at this acquisition in a negative light would be looking at it as a very competitive, low-margin business at the moment when we are starting to see smartphone saturation in certain markets like the U.S.,” de la Vergne said.

The U.S. smartphone market is dominated by Samsung and Apple, which combined have a 60 percent market share, and companies such as HP and Dell have tried and failed to crack the market, de la Vergne said.

“Lenovo does seem to be a little different,” he said. The company’s “aggressive pricing” could appeal to U.S. carriers who are trying to control the cost of subsidizing the price that consumers pay for smartphones.

Google is selling the Motorola smartphone business less than two years after acquiring it. Motorola posted an operating loss of $384 million in the fourth quarter on sales of $1.24 billion.

Buying Motorola would make Lenovo the No. 3 smartphone maker worldwide. In the latest quarter, Lenovo ranked fourth in worldwide smartphone shipments behind Samsung, Apple and Huawei, according to research firm IDC.

The Motorola deal, which Lenovo expects will close in six to nine months, isn’t expected to have a direct impact on the company’s Triangle operations.

Motorola, which has nearly 3,500 employees worldwide, is headquartered in the Chicago area and has the bulk of its employees – about 2,800 – there. Lenovo executives say that presence in Chicago will be maintained.

But Peter Hortensius, the RTP-based executive who heads the company’s Think business group that focuses on business customers, said in an interview that the deal nonetheless augurs well for the region.

“This has to be a positive,” Hortensius said. “If Lenovo is a stronger company, it stands to reason we will be stronger in North Carolina.” Effective April 1, Hortensius will become Lenovo’s chief technology officer under a new organizational structure announced by the company this week.

Lenovo’s presence in North Carolina is expected to nearly double under the other major deal uncorked by the company. Last week Lenovo agreed to pay $2.3 billion to acquire a line of servers from IBM.

Today Lenovo has about 2,200 employees in Morrisville and 300 at a manufacturing facility in Guilford County.

“Ultimately, we are doing these two deals because of our ‘PC Plus’ strategy,” Hortensius said, referring to the company’s diversification beyond personal computers. “Both deals are perfect fits.”

Frank Gillett, an analyst at Forrester Research, told Bloomberg News that there were parallels between the Motorola acquisition and Lenovo’s 2005 purchase of IBM’s PC unit – which provided the foundation that enabled the company to become a major player in the worldwide PC market.

“Lenovo was strong in its home country in PCs, but the IBM buy gave them a global brand and a lot of access,” Gillett said. “In buying Motorola, they are buying a major brand and a company that has established relationships with carriers.”

Ranii: 919-829-4877

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