Lenovo Slumps on Analyst Downgrades After $5 Billion Spree

Feb 04, 2014 3:26 am ET

(Adds closing share price in second paragraph.)

Feb. 4 (Bloomberg) -- Lenovo Group Ltd., which announced $5 billion of deals last month to bolster its server and smartphone businesses, plunged the most in five years in Hong Kong after the stock was downgraded by at least five brokerages.

Lenovo fell 16 percent to HK$8.41 at the close of trade, cutting $2.2 billion from its market value in the biggest decline since January 2009. The world’s biggest maker of personal computers was cut at UBS AG, Morgan Stanley, Jefferies Group LLC, JI-Asia Research Ltd. and Kim Eng Securities Ltd., according to data compiled by Bloomberg.

Chief Executive Officer Yang Yuanqing announced his company’s two biggest deals ever within a week as he seeks growth drivers to help weather a slump in global PC shipments. The purchase of International Business Machines Corp.’s low-end x86 server unit delivers corporate clients, while the following deal for Google Inc.’s Motorola Mobility was criticized for adding an unprofitable business with shrinking sales.

“We expect a negative impact on Lenovo’s net profit -- at least in the near term -- from the acquisition of Motorola Mobility,” Morgan Stanley analysts led by Grace Chen said in a Jan. 31 report. “It will take some time before Lenovo turns the business profitable.”

‘Potential Uncertainty’

The purchase of Motorola Mobility is “a necessary evil” to help Lenovo boost its U.S. presence and patent portfolio, Arthur Hsieh, an analyst at UBS, said in a Feb. 3 report.

Still, Motorola Mobility is expected to lose money for the next three fiscal years, and that will weigh on Lenovo’s earnings, Hsieh said in downgrading shares to neutral and lowering the price forecast to HK$10.30 from HK$12.

“The potential uncertainty in the MMI deal could offset the benefit from the IBM x86 deal,” Hsieh wrote.

Lenovo, which has headquarters in Beijing and Morrisville, North Carolina, agreed to pay $2.3 billion for IBM’s low-end server unit on Jan. 23, adding a business with wider profit margins than PCs and giving it about 14 percent of the market.

It then agreed to buy Motorola Mobility for $2.91 billion in cash and stock, adding a brand established in the U.S. mobile market and creating the world’s No. 3 smartphone vendor.

Motorola has reported falling sales as it lags behind Apple Inc. and Samsung Electronics Co. in smartphone shipments.

“Execution risk is high and increasing competition creates concerns,” Mark Po, an analyst at UOB-Kay Hian Ltd. in Hong Kong, said in a report today. “The integration of Motorola Mobility is likely to drag down overall profitability.”

Security Concerns

The PC market is coming off its worst year ever, with industry shipments dropping 10 percent in 2013, according to researcher Gartner Inc.

Lenovo maintained the No. 1 spot with 18.1 percent of the global PC market in 2013, helped by a 6.6 percent increase in shipments, according to Gartner. Hewlett-Packard Co. was second with 16.4 percent.

The proposed transactions may trigger U.S. security reviews that could slow or even scuttle the purchases as growing Chinese investment in the U.S. has prompted national-security concerns.

Proposed transactions by Chinese companies accounted for about 20 percent of reviews in 2012 by the Committee on Foreign Investment in the U.S, supplanting the U.K. as the most- scrutinized nation.

--With assistance from Moxy Ying in Hong Kong. Editors: Michael Tighe, Robert Fenner