PCs: Lenovo Back at Old M&A Approach with Fujitsu Talks

Bottom line: Lenovo and other Chinese firms need to abandon their approach that targets declining, older brands for global M&A, and instead focus on organic growth and more strategic assets with better growth potential.

Lenovo eyes Fujitsu’s PC business

The acquisitive Lenovo (HKEx: 992) was in M&A headlines again last week, when media reported it was in talks to buy the aging PC business of Fujitsu, an operation that is largely inconsequential outside its home Japanese market. Such a purchase would continue a trend dating back more than a decade, which has seen Lenovo purchase declining global brands for bargain prices with hopes of resuscitating those names to expand its global footprint.
But results have been lukewarm to poor in most cases, most recently with the company’s purchase of former smartphone giant Motorola that made big layoffs last month after failing to improve under Lenovo’s leadership. Lenovo is hardly alone in such a strategy, which sees Chinese firms buy aging global brands at bargain prices as a central part of their global expansion strategies.

Lenovo and others need to abandon such an approach or at least become far more selective, and focus on strategic acquisition targets and more organic growth that has helped propel names like Huawei and Xiaomi into far more stable positions both at home and abroad. Otherwise they could face a non-ending cycle of reorganizations and losses that ultimately relegate them to obscurity.

Chinese companies have a relatively brief history in global acquisitions, mostly due to their youth and lack of scale until the first decade of the 21st century. In the early days especially, Chinese companies often targeted declining western brands for their acquisitions, believing they could cheaply buy such names and quickly revive them by cutting costs by moving production to China.

Lenovo was one of the earliest among that field of overseas buyers, making global headlines a decade ago with its purchase of IBM’s (NYSE: IBM) PC business. Since then the company has repeatedly targeted similar fading brands for its overseas acquisitions, buying PC assets in Germany, Brazil and Japan, and most recently buying IBM’s low-end server business and the Motorola smartphone brand.

The company was back in similar headlines last week, when media reported it was in talks to buy the PC business of Japanese high-tech giant Fujistsu. (English article; Chinese article) The reports said the two sides were aiming to reach a deal this month, affecting around 2,000 workers from the Japanese company.

As part of such a deal, Fujitsu could transfer its PC design, development and manufacturing operations to a joint venture led by Lenovo, which would have the option to buy a majority stake. Fujitsu has been trying to dispose of the unit to focus on businesses with better growth potential. Talks at one point had focused on pooling the business with similar PC operations from Japanese rivals Toshiba and Vaio, a former unit of Sony, but no deal was ever reached.

Repeating the Past

The latest joint venture talks look similar to another deal Lenovo reached in 2011, when it formed a Japanese joint venture whose main asset was the fading PC business of local technology giant NEC. Lenovo bought out the joint venture earlier this year.

The NEC venture and now the potential one with Fujitsu were both part of Lenovo’s efforts to crack the difficult Japanese market, where consumers are notoriously loyal to domestic brands. As a result of its efforts, Lenovo now owns about a quarter of the Japanese PC market.

But the fact remains that the NEC and Fujitsu were both dying PC brands, in a broader global PC market that is also rapidly declining as consumers opt for a newer generation of smaller mobile devices led by smartphones, tablet PCs and e-readers.

Lenovo pursued a similar strategy of trying to diversify into some of those devices two years ago with its purchase of Motorola Mobility, repeating its familiar pattern of buying a brand that was once a global leader but later rapidly fell after failing to adapt in the fast-changing market. The purchase quickly became a drag on Lenovo, forcing it to launch a major reorganization that included the layoff of half of Motorola’s remaining staff late last month.

Lenovo’s latest purchase of Fujitsu is unlikely to be equally disastrous due to the unit’s smaller size and a more solid position in its home Japan market. But the move still represents a continuation of Lenovo’s older, more problematic acquisition strategy, and the company and other Chinese global acquirers should instead shift their focus to overseas targets with stronger growth potential in newer product areas rather than ones in decline.

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