Lenovo is still looking to acquisitions to fuel growth, less than two months after announcing a pair of deals valued at $5 billion that already threaten to stretch the company’s resources

Lenovo to Seek Acquisitions for Growth
Still Looking to Acquisitions After Unveiling Pair of Deals Worth $5 Billion.
LORRAINE LUK and JURO OSAWA
March 18, 2014 12:03 a.m. ET
HONG KONG—Chinese personal-computer maker Lenovo Group Ltd. 0992.HK +1.43%said Tuesday it is still looking to acquisitions to fuel growth, less than two months after announcing a pair of deals valued at $5 billion that already threaten to stretch the company’s resources.

The two deals—$2.3 billion for International Business Machines Corp.’s IBM +0.54% low-end server business and $2.91 billion for Google Inc. GOOG +1.61% ‘s Motorola Mobility handset operations—are part of Lenovo’s efforts to diversify beyond PCs, which have been hit by weak demand for desktop and laptop computers world-wide.
Lenovo, which last year became the world’s largest PC maker by shipments, has been looking for new sources of growth, focusing mainly on smartphones and enterprise products such as computer servers and storage systems.
“We will continue to use acquisitions as a means to grow,” Lenovo Chief Executive Yang Yuanqing said after a shareholder meeting in Hong Kong. “Whenever there is a good opportunity, we will grasp it.”
Lenovo executives say the company still has enough access to funds to keep building its business.
Last month, Lenovo Chief Financial Officer Wong Wai Ming said on an earnings conference call that the company would have enough cash to fund more expansion even after completing the Motorola and IBM server deals. Lenovo currently has access to around $4.7 billion in cash, he said. After paying $2.7 billion to cover the cash portion of its two deals, Lenovo would still have about $2 billion on hand, he said on the call.
On Tuesday, Mr. Wong said Lenovo is now considering raising funds from different channels, including bank loans, to take advantage of the low-interest environment, but he didn’t talk about any specific fundraising plans.
Analysts, however, have warned that digesting the latest two businesses—announced in late January— could hurt Lenovo’s overall profitability and stretch its management resources.
On Tuesday, Mr. Yang said that he was confident Lenovo will be able to turn around Motorola’s unprofitable business in four to six quarters after it completes the deal—a more specific time frame than he gave previously.
Mr. Yang said Lenovo aims to improve the profitability of Motorola’s handset operations by increasing economies of scale rather than trimming staff.
Lenovo already has a sizable handset business in Asia, and integrating Motorola’s operations will let the company significantly reduce material-procurement costs and other expenses, he said.
“We can continue to grow our business without cutting any employees,” Mr. Yang said.
Motorola’s handset business has already reduced its head count to around 3,500 employees from 30,000 in the past two years, Mr. Yang said. “The remaining employees are all talented, and most of them are engineers that can help improve Lenovo’s product development in mature markets,” he said.
It may be possible for Lenovo to erase Motorola’s loss and make the business break even in several quarters, because there is room for cutting manufacturing and procurement expenses in Motorola’s supply chain, said Daiwa Capital Markets Analyst Steve Tseng.
Still, in the long run, “it’s still unclear whether Motorola can become a stable source of profit for Lenovo,” the analyst said.
Lenovo, which bought IBM’s PC business in 2005, has since overtaken major U.S. rivals such as Hewlett-Packard Co. HPQ +3.66% and Dell Inc. in the global PC market. For the past few years, Lenovo has ramped up its investment in its mobile-device business. In late December, the company opened its new hub for research, development and production of smartphones and tablets in the central Chinese city of Wuhan, after spending $800 million to build the facility.
In China, the world’s largest mobile phone market, Lenovo is the second-largest smartphone vendor after Samsung Electronics Co. Since 2012, the company has expanded its smartphone business into other emerging markets such as Indonesia, India and Russia.