Lenovo Looking For Acquisition Targets

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Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992) is looking for new acquisition targets just two months after a pair of deals worth $5 billion to grow the company and make use of low interest rates that will probably rise in the next few years. Lenovo agreed to pay $2.3 billion for International Business Machines Corp. (NYSE:IBM)’s low end server business and $2.91 billion to Google Inc (NASDAQ:GOOG) for the Motorola Mobility handset division, report Lorraine Luk and Juro Osawa for The Wall Street Journal.

“We will continue to use acquisitions as a means to grow,” said Lenovo CEO Yang Yuanqing. “Whenever there is a good opportunity, we will grasp it.”

Lenovo plans to make Motorola profitable in 4 – 6 quarters

If Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992) is committed to growth through acquisitions, then financing M&A activity while interest rates are low makes sense, but there are concerns about Lenovo’s ability to integrate another new businesses when it will already have its hands full with two large, underperforming divisions. Lenovo has done an impressive job with the PC business it bought from International Business Machines Corp. (NYSE:IBM) in 2005, turning it into one of the most popular brands in the world, but Yang’s plan to make Motorola profitable in just 4 – 6 quarters is still ambitious.

Efficiencies of scale will certainly help, but part of the reason for Lenovo Group Limited’s (ADR) (OTCMKTS:LNVGY) (HKG:0992) acquisitions is to jumpstart its expansion into new product lines so that it is less reliant on the fading PC market, so there is a natural limit to such synergies. If Yang’s attention and resources are divided among multiple unprofitable or low margin businesses, executing on each of them could be a serious challenge.

M&A often destroys shareholder value

Growing through acquisitions is controversial, since it often destroys shareholder value in the long run – it’s not enough for Yang to make Motorola profitable, for example, it has to generate enough profit to outpace the cost of equity – and no doubt value investors are concerned about Yang’s game plan. Before the IBM and Google deals, Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992) had $4.7 billion in cash, but it will have to pay a combined $2.7 billion to settle the cash portions of those two deals. Lenovo has a number of options to raise capital, so it’s not that the company can’t afford more acquisitions, but many investors would probably just prefer to have some of that cash returned to them through dividends and buybacks.

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