Lenovo to buy Google’s Motorola in China’s largest tech deal

Lenovo to buy Google’s Motorola in China’s largest tech deal

6:27am IST

By Nadia Damouni, Nicola Leske and Gerry Shih

NEW YORK/SAN FRANCISCO, Jan 29 (Reuters) – Lenovo Group said on Wednesday it agreed to buy Google Inc’s Motorola handset division for $2.91 billion, in what is China’s largest-ever tech deal as Lenovo buys its way into a heavily competitive U.S. handset market dominated by Apple Inc .

It is Lenovo’s second major deal on U.S. soil in a week as the Chinese electronics company angles to get a foothold in major global computing markets. Lenovo last week said it would buy IBM’s low-end server business for $2.3 billion.

The deal ends Google’s short-lived foray into making consumer mobile devices and marks a pullback from its largest-ever acquisition. Google paid $12.5 billion for Motorola in 2012. Under this deal the search giant will keep the majority of Motorola’s mobile patents, considered its prize assets.

Shares of Google climbed 2.6 percent to about $1,136 in after-hours trading. Google Chief Executive Officer Larry Page said that Google would be best served by focusing on smartphone software rather than devices.

Reuters reported the deal earlier on Wednesday, citing sources familiar with the deal.

The purchase will give Lenovo a beach-head to compete against Apple and Samsung Electronics as well as increasingly aggressive Chinese smartphone makers in the highly lucrative U.S. arena.

In 2005, Lenovo muscled its way into what was then the world’s largest PC market by buying IBM’s personal computer division. It has powered its way up the rankings of the global smartphone industry primarily through sales on its home turf but had considered a U.S. sortie of late.

“Using Motorola, just as Lenovo used the IBM ThinkPad brand, to gain quick credibility and access to desirable markets and build critical mass makes a lot of sense,” said Forrester Research analyst Frank Gillett.

“But Motorola has not been shooting the lights out with designs or sales volumes in smartphones. So the value is simply in brand recognition to achieve market recognition faster – and to expand the design and marketing team with talent experienced at U.S. and Western markets.”


The deal is subject to approval by both U.S. and Chinese authorities.

Chinese companies faced the most scrutiny over their U.S. acquisitions in 2012, according to a report issued in December by the Committee on Foreign Investment in the United States. Analysts say political issues could cloud the Motorola sale, especially with Lenovo trying to seal the IBM deal at the same time.

Lenovo will receive over 2,000 “patent assets” as part of the transaction, the companies said, but it remains unknown which will change hands and whether they might be subject to extra scrutiny from regulators.

For Motorola, Lenovo will pay $660 million in cash, $750 million in Lenovo ordinary shares, and another $1.5 billion in the form of a three-year promissory note, Lenovo and Google said in a joint statement.

“The acquisition of such an iconic brand, innovative product portfolio and incredibly talented global team will immediately make Lenovo a strong global competitor in smartphones,” Lenovo’s chief executive, Yang Yuanqing, said in a statement.

In two years, China’s three biggest handset makers – Huawei , ZTE Corp and Lenovo – have vaulted into the top ranks of global smartphone charts, helped in part by their huge domestic market and spurring talk of a new force in the smartphone wars.

Although Huawei and ZTE have made some inroads in the United States, where the Chinese companies continue to grapple with low brand awareness, perceptions of inferior quality and even security concerns. Lenovo has until now stayed out of the U.S. market.

In the third quarter of last year, ZTE and Huawei accounted for 5.7 percent and 3 percent of all phones sold in the United States, respectively, trailing Apple’s 36.2 percent and Samsung’s 32.5 percent, according to research house IDC.

Huawei declined to comment on the Lenovo deal on Wednesday. ZTE did not immediately offer comment.

Globally, Lenovo ranked fifth in 2013 with a 4.5 percent market share, according to IDC. That’s up from 3.3 percent in 2012 and virtually nil a couple years before that.


For Google, the sale represented a solution to a persistent headache as Motorola’s losses widened in recent quarters. It also showed Google is willing to step back from the handset arena and throw its weight behind device makers that propagate its Android software, Kantar analyst Carolina Milanesi said.

“It all points to Google thinking in the short run that they’re better off betting on Samsung and keeping them close,” Milanesi said. “And of course now they’re enabling a second strong runner (Lenovo) in the Android ecosystem.”

In 2012, analysts saw Google’s Motorola acquisition as primarily a way to secure the company’s trove of patents amid the technology sector’s increasing legal battles – rather than a bona fide push into the handset business.

Many industry observers were surprised that Google did not immediately sell the hardware division after the deal closed, choosing instead to operate Motorola a separate company.

It did sell Motorola’s cable television set-top box business to Arris Group Inc for $2.35 billion at the end of 2012.

In a blog post on Wednesday, Google’s Page highlighted the strategic choice in selling the Motorola handset business.

“The smartphone market is super competitive, and to thrive it helps to be all-in when it comes to making mobile devices,” Page wrote. “This move will enable Google to devote our energy to driving innovation across the Android ecosystem, for the benefit of smartphone users everywhere.”


Lenovo to Buy Google’s Motorola Unit for $2.91 Billion

Lenovo Group Ltd. (992) agreed to acquire Google Inc. (GOOG)’s Motorola Mobility handset unit for $2.91 billion, as the Chinese personal-computer maker continues a buying spree of U.S. technology hardware businesses.

The sale includes $1.41 billion in cash and Lenovo stock paid at the close of the deal, with $1.5 billion to be paid in a three-year promissory note, Google said in a statement today. Google will retain a majority of Motorola Mobility’s patent portfolio, with Lenovo receiving a license to the intellectual property.

“We dream to become a global player,” Yang Yuanqing, chairman and chief executive officer of Lenovo, said in an interview. “This deal is a shortcut to enter mature markets.”

Lenovo has been looking to counter falling worldwide PC-industry shipments by expanding into storage equipment, the servers that run corporate networks, and mobile handsets. Buying Motorola would give Lenovo a stronger presence in the mobile-phone market in the U.S. and Western Europe. Lenovo is the fifth-largest smartphone vendor globally with a range of inexpensive handsets. It has begun to expand into premium smartphones in a bid to challenge Samsung Electronics Co. and Apple Inc. (AAPL) In September, the company released the Vibe X, which runs Google Android 4.2 mobile operating system.

A deal follows Lenovo’s agreement to purchase International Business Machines Corp. (IBM)’s low-end server unit for $2.3 billion earlier this month. In 2005, Lenovo also acquired IBM’s PC division.

‘Not Afraid’

“They’re not afraid of going out there and acquiring brands, especially to help them grow internationally,” said Andrew Costello, an analyst with IBB Consulting.

A sale lets Google shed a handset business it acquired as part of a $12.4 billion deal in 2012. The purchase pushed the Mountain View, California-based Internet search company into hardware and gave Google ownership of 17,000 patents to protect devices running its Android mobile operating system in legal disputes with competitors.

While Google has invested in Motorola, the unit’s revenue has declined. Motorola’s third-quarter sales fell by about a third, even as the company released Moto X, the first smartphone introduced under the direction of Google’s leadership. In November, Google announced it was rolling out a new lower-cost smartphone called the Moto G. Google reports fourth-quarter results tomorrow.

No Bargain?

Motorola’s patents have also shown signs that they weren’t a bargain. Google has lost patent cases or was delivered disappointing sums in cases that involved some of the intellectual property. Google had estimated in regulatory filings that $5.5 billion of the purchase price for Motorola was for patents and developed technology.

“This move will enable Google to devote our energy to driving innovation across the Android ecosystem, for the benefit of smartphone users everywhere,” said Google CEO Larry Page in a statement about selling Motorola to Lenovo.

A $2.91 billion sale of Motorola is a far cry from the $12.4 billion that Google paid for the business. Yet Google doesn’t appear to be taking much of a loss, analysts said. After closing the agreement to buy Motorola in 2012, Google got the unit’s $2.9 billion in cash. Google last year also sold Motorola’s set-top box business to Arris Group Inc. for $2.24 billion. And Google keeps the majority of Motorola’s patents, which it can license.

Conflict Free

“It’s probably not as bad as it first appears,” said Aaron Kessler, an analyst with Raymond James & Associates, who rates Google the equivalent of a buy.

Selling Motorola also lets Google resolve concerns among its Android hardware partners that it was putting devices made by Motorola ahead of those made by other companies, Kessler said. Now Google doesn’t have to compete with those partners, he said.

“It’s a positive Google is getting out of hardware,” Kessler said.

The deal comes two days after Google signed a patent-licensing agreement with Samsung to share their technologies. The agreement covers existing patents and those filed during the next 10 years.

Schmidt-Yang Dinner

In an interview, Lenovo CEO Yang said the company has long been interested in Motorola, including competing with Google to buy the business in 2011. When Lenovo lost out, Yang said he had Google Chairman Eric Schmidt over for dinner in Beijing. Over the meal, Yang said he told Schmidt that if Google ever wanted to sell Motorola’s hardware business, Lenovo would be interested.

Last November, Yang said Schmidt called him and the acquisition came together in two months.

Yang also said in a conference call that he has no plans for layoffs after the deal and will keep a main hub of the handset maker in Chicago. As of Sept. 30, Motorola had 4,259 employees.

Lenovo will continue using the Motorola brand in the U.S. and Latin America and is mulling the use of the name in China, Yang said. The company will gain scale and cost advantages from Motorola and plans to sell 100 million smartphones in the year after the deal, he said.

“We can not only turn around the Motorola business but further grow in this market,” Yang said during the call. “Motorola and Lenovo are competitive in different areas. When the deal closes, we will leverage all the capabilities of each side.”

The top five global smartphone vendors in 2013 by IDC’s rankings were Samsung with a 31.3 percent market share of shipments; Apple with 15.3 percent; Huawei Technologies Co. with 4.9 percent, LG Electronics Inc. with 4.8 percent and Lenovo with 4.5 percent.

To contact the reporters on this story: Alex Sherman in New York at asherman6@bloomberg.net; Brian Womack in San Francisco at bwomack1@bloomberg.net; Edmond Lococo in Beijing at elococo@bloomberg.net


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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