Lenovo Scoops Up Google’s Motorola, Global Presence To Increase

Lenovo Scoops Up Google’s Motorola, Global Presence To Increase

Nomura Global Markets Research analysts Leping Huang, David Hao and Zhuoran Wang rate Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992) as a Buy as the company will get a global footprint by acquiring Motorola Mobility.

On 30 Jan, Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992) announced that it will acquire Motorola Mobility from Google Inc (NASDAQ:GOOG) for USD2.91bn and hosted a conference call to discuss its strategy and vision for this acquisition. The deal is subject to approval by both US and Chinese authorities. During the conference call, Lenovo emphasized the following:

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Lenovo – Motorola Mobility acquisition to help achieve a global footprint

Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992) stated that Motorola’s brand, sales channel, and patents portfolio will help it to build a global footprint in its smartphone business, including immediate market share in the US (3.5%) and Latin America (8%), as a complement to Lenovo’s current leading position in China (11.8%) (Source:IDC).

Lenovo to focus on top-line growth to turn around business

Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992) indicated that Motorola already has a solid product portfolio (Moto X, Moto G and other models in the pipeline), but fell into a large loss (~USD248mn, -20% NPM in 3Q13) due to lack of revenue scale. Lenovo stated that it is confident that it will achieve a much bigger turnover from Moto brand smartphone sales vs. 2013 when it was managed by Google (USD4.7bn). The turnover of Moto mobility has declined by nearly 50% from USD9.5bn in 2011 when Motorola was still an independent company.

Deal is not cheap compared with Microsoft – Nokia

This deal mainly includes: (1) Motorola Mobility smartphone business (mainly in the US and Latin America) with an annual turnover of USD4.7bn and (2) a patent portfolio (ownership for 2,000 hardware-related patents plus non-exclusive license to remaining part of Motorola’s patents portfolio [~15,000]).

We compare this transaction with Microsoft Corporation (NASDAQ:MSFT)’s recent acquisition of Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s handset business as above. We assign USD1bn for the right to use Motorola Mobility’s patents portfolio because Microsoft paid USD2.1bn to Nokia for 10 years non-exclusive license of Nokia’s patent portfolio. Then the remaining USD1.91bn value for the smartphone OEM business, which implies a 0.41x price-to-sales, which is still higher than 0.32x P/S of Nokia’s handset business unit. We think the higher P/S may be due to the value of the Motorola brand, which is not part of the MSFT-Nokia deal.

Will Lenovo fall into quarterly loss after the deal closes?

The immediate impact for this transaction based on FY13 financial results shows that Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992) may be able to boost its group revenues by 13%, but it may fall into net loss.

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