Lenovo-NEC Smartphone JV: Where’s The Value?

Lenovo nears new smartphone JV with NEC

A day after we saw the latest sign that Lenovo (HKEx: 992) was pursuing a major purchase in the US, we’re getting news of another smaller deal by China’s leading PC maker with word of a new smartphone tie-up with faded Japanese brand NEC (HKEx: 6701). Whereas I quite like the US deal that would see Lenovo buy the low-end server business of IBM (HKEx: IBM), this smaller deal with NEC looks more like Lenovo’s older pattern of buying up dying global brands with little or no real value.

According to the latest reports, Lenovo and NEC have agreed to most of the terms for a tie-up that would see them form a joint venture consisting mostly of NEC’s cellphone operations. (English article; Chinese article) The reports, which site Japanese media, say talks are in the late stages, and that the 2 sides are likely to announce a deal later this month. Reports of this tie-up first emerged in early April, saying NEC was looking to sell its cellphone business to Lenovo. (previous post) Lenovo issued a statement saying it was in talks with an unspecified company about a smartphone joint venture, but that no agreement had been reached yet. (company announcement)

This newest tie-up would presumably be similar to an alliance between the pair in 2011, which saw Lenovo and NEC form a joint venture consisting mostly off NEC’s Japanese-based PC business. NEC provided its PC opeartions as its contribution to the venture, while Lenovo provided stock that NEC ended up selling last year. (previous post)

This kind of structure is beneficial to both companies, since it allowed NEC to exit its struggling PC business by handing it over to Lenovo to run via the joint venture. At the same time, Lenovo got a foothold in the difficult Japanese PC market, while paying for the deal mostly with shares rather than cash. This newest deal is likely to repeat that pattern, again giving Lenovo a foothold in Japan’s difficult cellphone market where consumers have typically shown a strong preference for local brands.

On the one hand, I should commend Lenovo on this latest deal as it certainly is consistent its frequently stated goal of boosting its smartphone business, especially at the high end, so it can compete with the likes of Apple (Nasdaq: AAPL) and Samsung (Seoul: 005930). At the same time, Lenovo probably won’t have to pay any cash for the deal, which should also give it a strong foothold in the Japanese smartphone market.

But more broadly speaking I do think that Lenovo will gain very little from the NEC cellphone brand. NEC cellphones are already a non-player in most of the world, paralleling a trend for many Japanese consumer electronics brands that are rapidly losing their luster in a global market they once dominated. Perhaps the NEC brand still enjoys some value in its home Japan market, though even there I suspect it’s rapidly fading as local consumers flock to more popular models from Apple, Samsung, and up-and-comers like Huawei and ZTE (HKEx: 763; Shenzhen: 000063).

That said, perhaps Lenovo’s main aim is less to revive the NEC brand, and more to acquire NEC’s Japanese sales channels. If that’s the case, then I do think Lenovo is probably paying too much for such a minor benefit, even if it’s paying for the deal with its stock. Lenovo has made many similar deals over the last 2 years in markets including Japan, Brazil and Germany, all of which have potential to create multiple integration headaches while bringing only small upside.

Instead of pursuing these kinds of smaller deals that offer minimal benefits and many potential risks, I would advise Lenovo to focus on bigger, more strategic purchases like its plan to buy IBM’s low-end server business. (previous post) Such bigger deals offer much better returns, and would allow Lenovo to stay focused on its goal of becoming a major global player in both traditional PCs and mobile computing devices.

Bottom line: Lenovo’s planned smartphone joint venture with NEC will bring minimal upside with significant risks.

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