The Likelihood of Success for Lenovo Group Ltd on its Acquisition of IBM - Example

Lеnоvо tаkеоvеr IBM Name and Student Number:   Tutorial day and Time:       Tutor’s Name: Word Count: Executive summary Lenovo Group Ltd, the largest vendor of smart phones in Mainland China. The third largest corporate IT buyout began in January 2005 when Lenovo Group Ltd announced that they will acquire IBM’s personal computer business, including the ThinkPad laptop and tablet lines valued at 1.25 billion dollars for IBM's personal computer and assumed an additional 500 million of IBM's debt. Overall, many analysis were critical of the buyout since IBM was struggling company before the buyout. The question that was raised by many analyses was: did Lenovo have a better deal? Lenovo Group Ltd had a simple strategy, buy a big brand name, move it to mainland China, drop the cost and export. This worked well with IBM's personal computer, when personal computer was already a mature market. Lower prices and acquisition of the IBM brand gave Lenovo Group Ltd the leading share of that market by 2013. But it was the leading share in a collapsing market. Total shipments for 2013 were down 10 per cent according to IDC. But in the past few years, Lenovo Group Ltd has been able to defy this trend, shipping 16.3 million units during the third quarter and taking the market-share lead from HP. Introduction The acquisition IBM brand has become a historic event for Lenovo Group Ltd and has marked a new era for the global personal computer (PC) industry. The new strategy has been based on what customers want: world class service and high quality products (Pfanner, 2013). Over the past years, the company has been committed to deliver most innovative PC and quality products and services to its customers, and create value for its shareholders (Ling, 2006). Lenovo is well positioned, with world class scale, competitive strengths in branding, and industry leading efficiency (Lemon, 2005). Lenovo product differentiation capabilities, R& D, global distribution network, and experienced management team gives the company a powerful competitive position in international markets (Pfanner, 2013). Lenovo’s strengths has been its international brand recognition through enhanced support and service for enterprise clients and consumers, combination of the highly regarded "Think" brand notebook franchise and Lenovo's leading brand recognition in China, market leadership and consumer strength in china, the world’s fastest growing information technology market (Hamblen, 2014). Lenovo has one-third of the emerging China PC market and leading shares in enterprise PC markets around the world. Lenovo’s Strategy The IBM buyout has given Lenovo another technology segment where the company can expand beyond smartphones, personal computers, smart TVs and tablets (Hamblen, 2014). Entering new markets in technology has been in the past a preferred entry strategy for many large corporate to grow (Pfanner, 2013). For example, Huawei in Shenzhen, China, and Samsung of Seoul, South Korea, these tech companies makes variety of products from smart watches to washing machines, tablet to chips displays that Lenovo so far does not (Hamblen, 2014). Before the buyout, IBM was the third largest vendor for personal computers in 2004, with five per cent market share. The combine Lenovo/IBM was expected to command a market share of about eight percent, making Lenovo to be third largest personal computer supplier worldwide (Pfanner, 2013). Global PC Market Share by units, Percent (2004-2013) Rank 2004 2005 2008 2012 2013 1 Dell 16.4 Dell 16.8 HP 18.2 HP 16.1 Lenovo 16.9 2 HP 14.6 HP 14.6 Dell 14.1 Lenovo 14.9 HP 16.2 3 Lenovo 6.8 Lenovo 6.9 Acer 10.6 Dell 10.7 Dell 11.6 4 Fujitsu 3.8 Acer 2.6 Lenovo 7.5 Acer 10.2 Acer 8.1 5 Acer 3.4 Toshiba 3.3 Toshiba 4.6 Asus 6.9 Asus 6.3 Others 55.1 53.8 44.9 41.2 40.8 Global PC market share Lenovo management realized in order to become a platform play it needs to have a robust product portfolio with attractive cost structures to gain share. Already, in China the company had 27 per cent share market. Having gain market leadership in China, the company aspired to become a global player (Hamblen, 2014). It achieved this by diversifying into non-PC areas such as the internet, mobile handsets and even going beyond IT. By acquiring an existing global player, the company has gain market share rapidly, the company established distribution channels and solve problems such as lack of sales and market experience in global markets, acquisition represented the best strategic option for Lenovo (Pfanner, 2013). In addition, “the company’s executives believed they would be able save more than 200 million dollars annually in supply chain efficiencies by combining with IBM’s PC division” (Hamblen, 2014). Other benefits that appear to fit into the long-term strategy for Lenovo, including: Instant presence and coverage outside mainland China; Lenovo had the opportunity to fulfill its company’s strategy and to achieve its global leadership in PC’s and related products; The widely recognized brand of IBM and its “Think” marks including “ThinkVantage”, “ThinkVision”, “ThinkPad” and “ThinkCentre” (Lemon, 2005). This would give Lenovo international awareness that could assist the company to establish a single global brand (Pfanner, 2013); Access to a highly experienced and skilled product development team and a portfolio of technology intellectual property; and Cost savings through economies of scale in best practice sharing and procurement (Loretta, 2012). Regulation Implications While Lenovo and IBM official were looking forward to making Lenovo third-largest PC giant globally, the buyout deal wasn’t without its regulation hitches (James, 2013). Some of the lawmakers in the U.S expressed their concerns that the deal would result in the transfer of sensitive technology to China that some consider an economic and political rival to U.S (Loretta, 2012). According to IBM Press Release (2004), members sitting in Committee on Foreign Investments in the United States (CFIUS), which is attached to the Treasury Department, were concerned that Lenovo workers might be used by their Chinese counterpart to conduct industrial espionage (Maney, 2005). According to the CFIUS report, the members were worried that Chinese security intelligences may use IBM facility located in North Carolina to launch industrial espionage against U.S and then further China’s military technology (James, 2013). “The Chinese government has majority share in Lenovo” (Maney, 2005). Recently, some eight Chinese companies were sanctioned by the U.S. government for assisting Iran government in their missile program (James, 2013). Nonetheless, CFIUS which review takeover of US firms by foreign investors has previously blocked similar acquisitions by organizations links to Chinese governments. For example, “in 2003, this committee prevented the of Global Crossing to Hutchison Whampoa Ltd, the Hong Kong conglomerate controlled by billionaire Li Ka-shing, because of security concerns raised by Chinese control of the company's international undersea cable communications network” (James, 2013). In March 2013, the deal got a green light after being reviewed but Lenovo and IBM were required to make some ‘minor changes to the deal to win federal approval (Ling, 2006). For instance, Lenovo staffs working at IBM’s design and manufacturing facility in Raleigh, N.C., must be housed in a separate building on the campus, and Lenovo would move its PC business headquarter o New York from Beijing (James, 2013). Valuation Lenovo's purchase of IBM's PC business in 2005 became the springboard for its leap to the top of global PC maker rankings (Barinka, 2014). Analysis estimated the acquisition of the IBM unit to Lenovo was worth between 1.7 billion dollars to 2 billion dollars. Therefore, it was the best deal on the part of Lenovo Group Ltd (Barinka, 2014). Lenovo shareholders argued that the company will enjoy economies of scale and that the sales of PCs would drive sales of other products (Jensen, 2005). Lenovo’s offer was seen by analysts to be overvaluing IBM’s PCs units, due to the firm’s shaky financial performance in the few years before the acquisition of made, as well as IBM’s own more conservative valuation of its assets (Martynova and Luc, 2008). Detractors of the acquisition argued that buying IBM was a “distraction” that would not directly help Lenovo take on Dell Computer's direct sales model or HP’s breadth (Jensen, 2005). Plus there were cultural differences between Lenovo and IBM, which made decisions by consensus and rapid autocratic styles, respectively (Jensen, 2005). One of IBM’s few bright spots was its customer services business, which was outperforming Lenovo’s own customer services division. Lenovo acquisition of IBM Financing Transaction As part of the deal, IBM received at least 650 million dollars in cash and up-to 600 million dollars in Lenovo Group stock, this was subjected to a lock-up period that expired in 2008 (Barinka, 2014). With this deal, IBM became Lenovo’s second largest shareholder with 18.9 per cent. In addition, Lenovo Group assumed 500 million dollars of net balance sheet liabilities from IBM (Barinka, 2014). The financing for this deal was funded through internal cash and debt (Ling, 2006). To pay for the transaction deal, Lenovo drew on cash hoard that was worth 2.46 billion dollars as of 30 September, 2004, while large part of the purchase was done through issuance of equity (Barinka, 2014). The issuance price per share was HK$2.675 and this was based on the closing price as of 3 December, 2004 (Barinka, 2014). Defence tactics Resistance to change is one of the reasons for the failure of change process and implementation of change. Resistance to change is ubiquitous by nature. It is defined as a natural response to any threat or reaction of change (Pfanner, 2013). In Lenovo acquisition of IBM, resistance was visible among shareholders and employees. Before the buyout there was tension among the IBM when the firm decided to lay off thousands of employees because of the acquisition (Barinka, 2014). People fight against change because they fear to lose something they value, or they don’t understand the change and its implications, or don’t believe that change makes sense, or find it difficult to cope with the change (Pfanner, 2013). About half of the 1700 employees at the plant in North Carolina went on strike over IBM’s transition package when the employees were told the company has been acquired by Lenovo as part of the deal (Barinka, 2014). Part of the deal between IBM and Lenovo requires the employees to take the job at the Chinese PC makers or get a minimal payout from the company, and this, among other conditions, is what made employees to be upset enough and forced them to go on strike (Loretta, 2012). As part of the security clearance deal, Lenovo and IBM agreed to retain close to 1900 employees from its research facility in North Carolina that IBM shares with other technology companies (Pfanner, 2013). To help quell employee fear, Lenovo put out a statement of its own in the wake of the strike and protests, which had died down considerably in the past week (Barinka, 2014). Lenovo reminded everyone that the 7,500 employees who work for the IBM PC’s division-including product development, manufacturing, sales and marketing, and staff employees in locations around the world—will be retained by Lenovo (Pfanner, 2013). Implementation of the Deal Since its acquisition of IBM, Lenovo has been outpacing its personal computer competitors for 20 consecutive quarters and in 2013 it became number one company worldwide. Nevertheless, the company has diversified into other products in the face of slow demand for PC’s. Lenovo intention of buying IBM’s low-end, x86 server business, this deal will propel Lenovo from number six to number 3, making the company to be a major player in the server market much faster than it otherwise would on its own. An interest parallel that can be drawn into the acquisition is that 2014 mobile devise market has many players that in 2005. Firms like ASUS were small at that time, after the acquisition, mobile industry exploded in terms of vendors with low cost to higher service. This acquisition was not direct catalyst, but it did happen at an inflection point in the market. For Lenovo it is a fast way of doing things that they have already planned to do (Mallette and Robert, 1995). In addition, this acquisition has added credibility among its customers. This acquisition does make sense there would be no sell-off in the near future because it is the goal of Lenovo to remain number one in PCs Production The profit index of Lenovo in 2009, 2010 Risk Acquisitions by publicly listed firm have been debated by financial analysts. Opinions as to whether or not a particular acquisition is beneficial to shareholders of the firm that is doing the acquisition tends to create volatility in the firm’s share price in the period between the announced intention to make an acquisition and the actual closing of the deal (Jensen, 2005). One of the major risks that is associated with acquisition is that firms that bid with other firms to acquire another firm may be forced to pay high purchasing price (Jiraporn, 2005). This usually make share price of the company acquiring another firm to fall in the aftermath of the acquisition (Pfanner, 2013). On the other hand, the company that has been acquired normally experiences a sudden sharp rise in its share price since a potential buyer would need to offer a substantial premium above the market price to entice the shareholders of the takeover target to accept the deal. For instance, “after the announcement of a $1.75bn deal to buy the PC unit of IBM, Lenovo saw its Hong Kong share price drop as much as much as 7.5 % to HK$2.475, while IBM share price increased to 14% to $ 12.05” (Pfanner, 2013). Therefore when more than one firm is interested to acquire another firm (Magnuson, 2009), a takeover war between the firms will ensues with higher price being paid leaving shareholders of the target firm very often capitalizing on some significant gains (Magnuson, 2009). It understood Texas Pacific Group which was fiercest rival for IBM business offered about 100 million dollars less, all in cash. Performance of IBM Shares According to study by KPMG found that 83% of acquisition deals did not boost shareholders vale and 53 per cent actually reduced it Another study found that the total return to shareholders on 115 global mergers and acquisitions was a negative 58% (Martynova, and Luc, 2008). Therefore it not difficult to conclude that the acquisition of IBM was detrimental to Lenovo shareholders since the company experience some losses before it started making profit from the acquisition after sometimes. Conclusion IBM’s sales of its personal computer business to Lenovo are the best possible outcome for all concerned. Based on the past history, the likelihood of success for Lenovo Group Ltd on its acquisition of IBM is high. IBM will be able to forge ahead unhindered in its quest for continued innovation in enterprise systems and in the highly competitive cloud computing arena. Since the inception of consumer behavior analysis, being strategic when approaching the market in order to be able to make sales in the cut throat diminishing market is crucial for the business success. Pricing products is probably one of the major tactics employed by both new and old businesses. Since the market analysis sets a target of sales within twelve months period. Make penetration is one of the most essential aspects to be considered. While aiming to enter deeply into the market, Lenovo has lower the price of its products, while maintaining the profit margin. This strategy is essential since the market is expected to be highly elastic meaning that the consumers are highly sensitive to prices in the target areas since for a long time PC prices were relatively high and there was need for better pricing that will favor consumers. The importance of identifying a company’s strengths, weaknesses, opportunities and threats is fundamental in order to establish the real position of the company in the market. In addition, it enables companies to re-evaluate their strategies in order to remain competitive in the market. In light of the above SWOT analysis of Lenovo. I have found out that the company’s weaknesses can be used to penetrate the industry and the market by any new competitor. Few past years, Lenovo is working towards rectifying its weakness, that other companies takes advantage of such weaknesses to gain a competitive position in the market. References Barinka, A 2014, “Lenovo to Buy IBM Server Unit for $2.3 Billion Amid Slump”. Bloomberg News. Hamblen, M 2014, ‘Lenovo's IBM server deal mimics multi-market growth strategy used by Samsung and others’, computerworld.com Retrieved from < http://www.computerworld.com/s/article/9245660/Lenovo_s_IBM_server_deal_mimics_ multi_market_growth_strategy_used_by_Sammsung_and_others. IBM Press Release 2005, 'Lenovo To Acquire IBM Personal Computing Division,' December 7, 2004 James K 2013, Research Serv., RL33388, The Committee on Foreign Investment in the United States (CFIUS). Lemon, S 2005, "Lenovo Completes Purchase of IBM's PC Unit". PC World. pcworld.com. Retrieved June 19, 2012 Ling, Z 2006, The Lenovo Affair, John Wiley & Sons, Singapore. Loretta, C 2012, "As Rivals Outsource, Lenovo Keeps Production In-House". The Wall Street Journal. Retrieved July 12, 2012. Jensen, M. 2005, "The Takeover Controversy." Vital Speeches of the Day 53.14, 426-429. Jiraporn, P 2005, "An Empirical Analysis of Corporate Takeover Defences and Earnings Management: Evidence from the US." Applied Financial Economics 15.5: 293-303. Magnuson, W 2009, "Takeover Regulation in the United States and Europe: An Institutional Approach" Pace International Law Review 21:205, 205-240. Mallette, P and Robert S 1995, “State Anti-Corporate Takeover Laws: Issues and Arguments” Journal of Managerial Issues 7:2, 142-160. Maney, K 2005, 'The New Face of IBM,' Wired, pgs. 142-149 Martynova, M and Luc R 2008, "A Century of Corporate Takeovers: What Have We Learned and Where Do We Stand?" Journal of Banking & Finance 32.10, 2148-2177. Pfanner, E 2013, "King of PCs, Lenovo Sets Smartphone Ambitions". The New York Times. Read More