Lenovo stocks drop as doubts over deal loom
By Liu Baijia (China Daily)
Updated: 2004-12-10 09:06

The marriage between China's No. 1 computer maker Lenovo Group and the world's biggest information technology giant IBM in their personal computer business has received a mixed response. Yesterday, Lenovo's stock prices witnessed ups and downs in the Hong Kong Stock Exchange.

The stocks of the Chinese computer maker rose by 6 per cent early yesterday morning after trading in them was suspended for three days, but fell by over 10 per cent to close at HK$2.58 (33 US cents), when several international investment banks voiced some doubts about the deal.

IBM's stocks on the New York Stock Exchange closed at US$96.65, gaining 0.57 per cent, on Wednesday.

Lenovo and IBM inked a deal on Wednesday in Beijing for Lenovo to acquire IBM's PC business at a price of US$1.75 billion, including US$650 million in cash, Lenovo stocks worth US$600 million, and US$500 million of debts of IBM's PC business.

The Chinese computer maker will also have the right to use IBM's Think brand notebook franchise.

Smith Barney of the Citi Group yesterday showed a sceptical attitude in a research report and maintained its "Sell" rating on Lenovo's stocks, but the target price was sharply cut from HK$2.61 (33 US cents) to HK$2.02 (26 US cents).

The investment bank claimed the price was too high, as IBM's PC business is just around the balance line in its financial performance and with the possible flow of customers after the merger, the value of IBM's unit is only US$500 million.

It added there were few successes in mergers between computer companies.

Nigel Knight, newly appointed head of IBM's business consulting service in China, said yesterday his unit had sent two "most senior consultants" to the new joint venture to facilitate the integration process and IBM's previous experience in mergers with companies like Pricewaterhouse Coopers would help the process.

Australia's Macquarie Group also gave a "Sell" rating, because of worries about the prospects of the merger.

Alan Hsieh, president of the US IT market research house International Data Corp (IDC)'s operations in the Chinese mainland, Hong Kong and Taiwan, pointed out that Lenovo will have huge challenges on the road ahead.

"There is a big risk for the new company, as there is no significant progress in Lenovo's globalization and it has little experience in international operations," said Hsieh.

He said Lenovo must work very hard to avoid any big incidents during the transition, as such a process was very complex and involved thousands of employees, research, production and brand consolidation.

However, there are more benefits for the two companies than challenges, IDC said.

Hsieh said he believes the scale of the two companies would enable the new Lenovo to have greater bargain-ing power and would be helpful in its competing against Dell and HP.

A simple combination of Lenovo and IBM's shipment of computers would create the third largest computer maker in the world with 11.9 million units and US$12 billion of revenues.

"Lenovo gains the global reach and scale to compete internationally while strengthening its position in relatively high growth commercial and portable markets," said Alan Promisel, mobile computing analyst with IDC in a report.

IDC said IBM's advantages and resources in technology, brand, distribution channels, customer base, financing and sales forces will be complementary to Lenovo's strength in production.

It estimates the new Lenovo will continue to focus on enterprise customers, a stronghold of IBM, but it will expand in all business lines in China from high-end enterprise users to home consumers.

Lenovo Chairman Liu Chuanzhi said on Wednesday it may take US$1.2 billion for Lenovo to create a brand as influential as IBM's Think, so even only from that stand, the deal was worthwhile to Lenovo. He said the merger would not erode the loyal customer base of IBM, since the new company would use only the IBM brand for 18 months and after that it will use the IBM-Lenovo brand.

He said there is no need for IBM's present employees to worry, since all current IBM executives and employees will remain in their posts and locations, but after the merger, they will have greater room for development. The Lenovo founder said IBM is famous for high returns, but they were achieved on high investment. Now, Lenovo will be able to achieve high returns on lower investment with Lenovo's cost advantages.