Blyth Technology Group
The market is overly pessimistic on Lenovo’s
ability to integrate and profit from their recent
acquisitions, Motorola and IBM’s x86 server
business, which we believe will prove to be
long-term drivers of growth and shield the
company from declining PC sales.
Ticker (ADR): LNVGY
Current Price: $20.34
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Market Cap: $10.54B
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52-week range: 16.55-27.99
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Dividend Yield: 2.54%
Lenovo is the world’s leading personal
computer manufacturer, serving
customers in more than 160 countries.
Products: Think-branded commercial
PCs, Idea branded consumer PCs,
servers, workstations, smartphones,
tablets
Three geographic segments: China,
emerging markets (excluding China),
and mature markets
Competitors: Apple, Dell, HP, Acer,
and Asus in the PC market; Apple,
Samsung, HTC, Blackberry, and Nokia
in the smartphone market; and HP,
Dell, Fujitsu, and Cisco in the server
market.
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CEO (2009) & Chairman of Board (2011): Yuanqing Yang
CTO & Head of R&D: Dr. Peter Hortensius
o IBM (17 years) - VP for Products and Offerings
Executive VP, Enterprise and Americas : Gerry P. Smith
o Ex-GM of notebook development at Dell
o Currently oversees x86, backbone of the Enterprise Unit.
Executive VP, Mobile Group: Jun LIU
o Currently oversees smartphones, smart TVs, slabs.
o Prior leadership in business group, products group, global
supply chain.
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1/23/14: Acquired IBM’s x86 server business for $2.3B to become 3rd
largest server producer
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1/29/14: Acquired Motorola Mobility from Google for $2.9B to become
3rd largest smartphone manufacturer
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2/3/14: Announced tentative plans to buy Sony’s Vaio PC business
2/14/14: Reported Q3 earnings; massive growth but slowing
smartphone sales in China and warning of short-term troubles due to
acquisitions
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Recently bought IBM’s x86 server business
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“Low end” servers for use by government institutions and 95% of US corporations
(as opposed to research/supercomputing)
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Purchase price was $2.3B, down from $4.5B a year ago
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Acquiring the business for cheap
Deal involves heavy cooperation between IBM and Lenovo
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IBM will continue to distribute x86 under its own brand in the US for near future
and support new and existing users of the technology
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Lenovo will actively push IBM server technology in China
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Acquisition makes Lenovo 3rd largest server producer in the world
Lenovo should be able to cut costs by moving production to China
Lenovo’s position within China should be able to drive sales growth
Deal should be approved since Lenovo is well-trusted by now and
the deal increases competition
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Further develops relationship between IBM and Lenovo, which has
proven to be highly profitable for both companies in the past
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Lenovo currently producing smartphones and tablets in its MIDH
(Mobile Internet and Digital Home) division
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Fastest growing segment at Lenovo
Currently 2nd largest smartphone producer in China after Samsung
and among the fastest growing
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Recently bought Motorola from Google for $2.9B
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World’s largest smartphone market, and Lenovo’s current home
base
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China Mobile currently rolling out its 4G LTE networks, should be
complete by end of 2014
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Currently, only 330 million smartphones in China for population of
1.3 billion
o 25% adoption rate vs. 75% for US
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Growing middle class, ample liquidity should boost demand
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Instantly makes Lenovo the 3rd largest smartphone producer in the
world after Apple and Samsung
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Google never really focused on running Motorola and was more
interested in the patents than the hardware business
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MASSIVE synergies
o Motorola brand awareness gives Lenovo a stronger foothold outside China
o Barclays analyst Kirk Yang estimates that integration could cut 70% of
Motorola’s expenses
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In 2004, Lenovo bought IBM’s loss-making PC business for $1.75B
General consensus was “Lenovo Who?”
Lenovo was still trying to expand outside China
Concerns about cultural differences between Lenovo and IBM
People thought PC market was too competitive, HP-Compaq would
destroy the young company a la Apple or Samsung
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Time horizon: 12-18 months
Price target: $26.00
Sell if: No margin improvements for x86 and Motorola by year’s end