Lenovo Learns How To Say “No”

Lenovo gets pickier towards expansion, M&A

I’ve often criticized PC giant Lenovo (HKEx: 992) for its overly aggressive policies towards M&A and expansion, so I’m quite happy to offer some praise for the company’s sudden ability to say “no” in 2 recent moves that looked problematic. In the last 2 weeks, the company that formerly couldn’t walk away from any expansion deal has suddenly scrapped 2 potential new initiatives, one in smartphones and the other in online gaming consoles. The former instance has seen Lenovo walk away from a plan to take over the struggling cellphone business of Japan’s NEC (Tokyo: 6701), while the latter has seen the company get rid of its game console business called Eedoo.

It’s probably too early to say these 2 instances mark a major change of strategy for Lenovo, which has more often shown a tendency to acquire businesses rather than pass up M&A opportunities and sell poorly preforming units. But more similar disposals and a greater selectiveness towards future M&A would certainly be an encouraging sign, reflecting a maturing company that is focused on maximizing its existing businesses.

All that said, let’s look at the latest headlines, starting with the collapse of Lenovo’s earlier talks to form a smartphone joint venture with NEC. The talks, which were first reported last month, would have produced a joint venture whose main assets were NEC’s struggling cellphone business. (previous post)

The deal would have essentially handed over NEC’s cellphone business to Lenovo, which was hoping to use the relatively high-end but struggling Japanese brand to complement its own recent push into smartphones. Such a joint venture would have been similar to another tie-up 2 years ago that saw Lenovo take over NEC’s PC operations through another joint venture.

Now media are reporting that the latest smartphone tie-up talks have collapsed for unspecified reasons, leading NEC to abandon the cellphone business. (Chinese article) The decision by NEC marks the end of a long downturn for the company’s cellphone division, which was once a major name in Japan and also enjoyed modest success on the global stage before its fortunes began to decline.

An acquisition of the unit by Lenovo would have followed a similar pattern from the past, which saw the Chinese PC giant purchase struggling assets from other firms in a wide array of markets ranging from Germany to Brazil and Japan. I’ve been largely critical of most of these deals, which usually involved struggling assets that would be extremely difficult to fix. Lenovo was also reportedly interested in another unspecified tie-up early this year with struggling Japanese electronics firm Sharp (Tokyo: 6753). But it’s been months since any news of those talks has appeared, meaning perhaps Lenovo has also decided to abandon that deal.

Meantime, other media reports are saying that Lenovo has quietly sold off its Eedoo gaming console unit to an unnamed software company. (English article) There’s not much additional detail to the reports, perhaps because Eedoo has been an insignificant factor in Lenovo’s business since the unit’s launch in 2010. This gaming console initiative looked doomed from the beginning, mostly due to intense competition from Microsoft (Nasdaq: MSFT) and Sony (Tokyo: 6758). The Chinese preference for online games over expensive consoles, combined with rampant piracy in China, also made Lenovo’s console gamble look like a tough proposition from the outset.

Of course there’s still one major M&A opportunity on Lenovo’s radar screen, namely its desire to purchase the low-end server business of IBM (NYSE: IBM). Those talks began early this year, but later broke down due to disagreement over price. (previous post) I previously predicted the 2 sides would revive the talks, as I do believe such a deal would make good sense for both companies. I still believe we could see such a deal, perhaps later this year; but in the meantime I’m also quite happy to see that Lenovo is getting more selective in its M&A strategy and expansion into new business areas.

Bottom line: Lenovo’s scrapping of a cellphone tie-up with NEC and exit from gaming consoles could reflect a growing selectivity towards expansion and M&A.

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