Lenovo figures it can prosper by picking up hardware businesses that U.S. tech companies toss aside. But its acquisition of Motorola's handset business from Google is a step too far.
Just last week Lenovo bought IBM's low-end server business. This makes sense. To turn that business around, it has to cut costs and ramp up sales in China, aided by the fact that Chinese state-owned companies are now shunning U.S.-made hardware.
Motorola will be much harder to turn around, and investors sensed it, sending Lenovo shares down 8% in Hong Kong. Lenovo Chairman Yang Yuanqing says the deal is a "shortcut" into the U.S. market, and hopes Lenovo can double its handset sales to 100 million units in a year. Shortcuts in business rarely turn out well.
Lenovo will be acquiring a well-received, stylish product lineup with the Moto X and Moto G. But as past champions BlackBerry and HTC know, smartphone success is fleeting and requires constant innovation. To succeed in the U.S., Lenovo will need to invest heavily in research and development, design, marketing, and carrier relationships.
None of those are Lenovo's strong points. Since it acquired the ThinkPad brand from IBM in 2005, it has been known for functional, no-frills notebooks, not sleek design. Lenovo was the fifth largest smartphone seller in the world last year according to IDC, but that is mainly due to China and other emerging markets, where it specializes in lower-end devices. As for marketing savvy, Lenovo came up with the rather uninspiring product name "LePhone."
Despite the Motorola sticker price being a quantum leap below what Google paid, Lenovo isn't getting a bargain. Bernstein Research calculates Lenovo is paying 0.6 times last 12 months' sales for an asset that made deep losses the last two years. By contrast, IBM's server unit went for 0.5 times sales and was close to breaking even.
Picking up IBM's personal computer business was a coup, and its follow-up for the server business looks clever, but this attempt to dive into the U.S. smartphone market with Motorola smacks of hubris.
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