Bottom line: Lenovo’s ejection from the Hang Seng Index caps its long fall from grace over the last four years, and leaves the company in an increasingly deep hole that may be hard to emerge from.
Capping its long fall from grace, PC giant Lenovo (HKEx: 992) has been officially booted from the Hang Seng Index, in a move that looks highly symbolic but also has some very real ramifications for this former high-flyer. It’s probably too early to relegate Lenovo to the history books, but we can certainly say the company is down for the count with this latest blow.
As someone who has followed Lenovo for most of its life as a listed company, I can provide my own view that the company is certainly facing a life-or-death moment in its lifetime that dates back more than three decades, making it one of China’s oldest tech names. I have called repeatedly for the departure of CEO Yang Yuanqing and introduction of some newer, younger blood to the company’s top ranks. But it doesn’t seem that Yang’s boss, Lenovo founder Liu Chuanzhi, cares too much what I think, as he has repeatedly stuck with this right-hand man throughout the company’s decline.
All that said, let’s briefly review the latest headlines that say Lenovo has been formally taken out of the Hang Seng Index, which is Hong Kong’s equivalent of Dow Jones Industrial or S&P 500. (English article) The move was announced after market close on Friday, with the Hang Seng compiler saying Lenovo would be replaced in the index by CSPC Pharmaceutical (HKEx: 1093).
Hong Kong watchers will know CSPC’s addition is also somewhat symbolic, since Hong Kong just rolled out new rules at the end of April specifically allowing loss-making companies from the hot pharmaceutical industry to list on its main board. Prior to that exception, all companies had to post three consecutive years of profits before being able to list on Hong Kong’s main board.
But let’s return to our main focus, Lenovo, whose shares were down 3 percent in early Monday trade in the first session after its removal from the Hang Seng was announced. The decline probably wasn’t worse because this particular move had been rumored for weeks, meaning people knew it was coming and previously dumped the stock. At its current levels, the stock now trades at lows not seen since 2009, which is when the company was going through a similar crisis.
Historians may recall Lenovo burst into the global headlines in 2005 with its landmark purchase of IBM’s (NYSE: IBM) PC business, instantly making it China’s first truly global high-tech company. Lenovo also had trouble digesting the IBM unit, which was what led to its earlier crisis that saw its stock hit an all-time low in early 2009. But the company later found its footing and went on to take the global PC crown from former leader HP Inc. (Nasdaq: HPQ).
King of the World
Lenovo was briefly on top of the world after that, and Yang went on to proclaim his next target was to become the world’s top smartphone brand. He tried to take a page from his own playbook shortly after that, substituting faded former cellphone superstar Motorola in for IBM with another major acquisition in 2014.
But that deal didn’t go quite the way that Yang had planned, and he was never able to really resuscitate the Motorola brand. There are probably many theories on why that plan backfired even after the IBM one succeeded. My best guess is that IBM’s PC business was still salvageable at the time of that acquisition, as it was still reportedly breaking even and enjoyed a solid reputation as a leading-edge player.
By comparison, Motorola was already on its last legs when Lenovo bought that company. What’s more, the Motorola that Lenovo purchased had been stripped of most of its best intellectual property by former owner Google. In effect, the company was mostly an empty shell by that time, and its most valuable asset was its name that by then was mostly admired by cellphone historians.
All that brings us to the present, where Lenovo suffered its latest setback at the end of last year when it lost its PC crown to HP again, adding to its woes. Against that backdrop, this dropping of the company from the Hang Seng is just more fuel for the company’s downfall. I wouldn’t count Lenovo out for the count just yet, but would say the odds against a recovery this time are certainly not in its favor.