Lenovo Stock Plunges As Investors Worry Over Acquisition Strategy

Lenovo Stock Plunges As Investors Worry Over Acquisition Strategy

Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992) continues to decline since disclosing its decision to acquire Motorola Mobility, the subsidiary of Google Inc (NASDAQ:GOOG) that develops smartphones for $2.91 billion.

The shares of Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992) were down by more than 11% to $22.49 per share at the time of this writing, around 12:44 in the afternoon in New York.

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Challenges related to acquisitions for Lenovo

The stockholders of Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992) started dumping their shares in the company following its deal to acquire Motorola Mobility. Investors were concerned about its acquisition strategy. Lenovo also purchased the low-end server business of International Business Machines Corp. (NYSE:IBM) for $2.3 billion last month.

Market observers opined that Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992) will face challenges of turning Motorola Mobility into a profitable business and swiftly integrating the low-end server business into to its corporate strategy.

Bernstein Research analyst, Alberto Moel commented “At this point, we believe Lenovo may have bitten off more than it can chew.”

According to Moel, Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992) needs high investment power, financial resources, and care and feeding to make Motorola Mobility a success as well as the low-end servers it acquired from IBM.

Moel pointed out that just like Motorola Mobility, International Business Machines Corp. (NYSE:IBM)’s x86 server business was also losing money, but he thinks it “could become a new profit pool [for Lenovo] even if the margin expansion is modest.” The investment research firm previously estimated that the x86 server business could add $4 billion to $5 billion annual revenue to Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992).

On the other hand, Jefferies analyst Ken Hui, said Lenovo’s acquisition of Motorola Mobility is a “correct move, but will lead to multiyear negative impact on earnings.” He added, “Without cutting expenses, Motorola has to double sales to break even, which is challenging.”

Building pillars of growth

In a recent interview, Yang Yuanqing, chief executive officer of Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992) explained that the company’s latest moves are part of its strategy to build two pillars of growth for the next decade— smartphones and tablets business as one pillar and the second pillar is enterprise business including servers and storage.

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