Lenovo saw its Hong Kong share price drop as much as 7.5 per cent on Thursday morning to HK$2.475, as trading resumed after it announced a $1.75bn deal to buy the PC unit of IBM.
The deal - the biggest overseas acquisition by a Chinese technology company - marks IBM's exit from a market it created with the first IBM PC in 1981.
Lenovo will pay $650m in cash and up to $600m in shares giving IBM an 18.9 per cent stake as well as shouldering $500m in debt. Analysts said the relatively low price put on a unit with sales of $9bn reflected its low profitability and Thursday’s share price reflected market concern over Lenovo’s ability to turn it into a healthy business.
The stock - suspended since Monday - recovered slightly by Thursday midday to HK$2.55.
The purchase will quadruple Lenovo's sales to more than $12bn, allow it to use IBM's brand under licence for five years and give it control of the Think trademark used on IBM's popular business laptops.
On Wednesday, Yang Yuanqing, president of the Chinese company, warned, the world market leaders, that it would not be satisfied with its new position as the world's third biggest PC supplier.
It is understood that US private equity fund Texas Pacific Group was Lenovo's fiercest rival for the IBM business, which had been quietly for sale for nearly three years.
People close to the deal said TPG offered about $100m less, all in cash, but IBM opted for Hong Kong-listed Lenovo's offer in part because it wanted to retain a stake in the business. They said Lenovo would list in the US within a year to reflect the global scope of its operations.
The sale of such an iconic business underlines the shift of the increasingly commoditised PC business towards China. While IBM wants to focus on lucrative services, Lenovo executives cited the PC business's gross margins of 20 per cent as part of its appeal. Lenovo's gross margins, under pressure in China from local and foreign rivals, are less than 15 per cent.
Analysts have warned of the difficulties Lenovo faces in managing a big foreign business and retaining IBM's customers and employees.
However, Lenovo has moved to minimise such risks by appointing Stephen Ward, IBM senior vice-president, as chief executive, transferring its head office to New York and retaining IBM as preferred supplier of after-sales service outside China. The five-year transition to reliance on the Lenovo brand should help retain customer loyalty.
Lenovo outsources production of laptops and IBM uses contract manufacturers for its PCs but both played down the impact on suppliers and employees. “Lenovo has given a firm commitment that it will match the type of competitive compensation packages that IBM offers,” Mr Ward told the Financial Times, adding that no job losses were expected.
IBM's competitors predicted the deal would fail. “When was the last time you saw a successful merger or acquisition in the computer industry?” said Michael Dell, chairman of the world's largest PC maker.
Merrill Lynch advised IBM and Goldman Sachs advised Lenovo./www.news.ft.com/