SMARTPHONES: IBM Dumps Sputtering Lenovo

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Bottom line: IBM’s sale of its Lenovo shares isn’t surprising since it probably received the stock as part of a recent transaction between the pair, but  still comes as the latest sign of no confidence in the struggling Chinese PC giant.

IBM dumps Lenovo shares

Things just keep getting worse for struggling PC maker and smartphone wannabe Lenovo (HKEx: 992). Just 2 weeks after new data showed the company’s smartphone sales plunged in its home China market at the end of last year, new reports are saying that US tech giant IBM (NYSE: IBM) is dumping the Lenovo shares that it received as part of a recent transaction between the pair of companies.

The amount of the sale doesn’t look that big, with IBM looking to sell about $150 million worth of Lenovo shares, the reports say. (English article; Chinese article) But it’s important to note those same shares were worth about twice as much in October 2014, which is when IBM probably first received the stock as part of a sale of its low-end server business to Lenovo for $2.1 billion.

Making matters worse, IBM was looking to sell its 182 million Lenovo shares at a 6 percent discount to their trading price when word first broke of the move this week. That sparked a sell-off for Lenovo shares, which shed 4 percent in the latest trading session in Hong Kong. They closed on Thursday at HK$6.42, which is exactly the price that IBM was reportedly seeking for the shares, according to a term sheet leaked to the media.

If all this sounds vaguely familiar to some old timers, it’s because nearly the same thing happened almost a decade ago. Lenovo had purchased IBM’s PC business at the time, and paid for the unit partly with its stock. Lenovo then struggled to absorb the IBM business, and IBM sold off its Lenovo shares as soon as a lock-up period ended.

It’s a bit unclear if another end to a lock-up period was the impetus for IBM’s decision to sell now, since we don’t know when it actually received the Lenovo stock and under what conditions. But regardless of those circumstances, IBM’s move still comes as the latest no confidence vote in Lenovo, whose core PC business is rapidly maturing and whose newer smartphone unit is sinking fast.

Plunging Smartphones

Data released last month showed that Lenovo’s share of the China smartphone market plunged by two-thirds to just 2.9 percent in last year’s fourth quarter, as its cheap, nondescript models failed to find an audience. (previous post) The plunge was even more noteworthy since Lenovo has huge advantages over other brands in the market due to its own dominant position as China’s leading PC brand.

Adding to Lenovo’s woes, the fast-rising Huawei last week unveiled its first notebook PC model, in a move that looks square focused at challenging Lenovo in their home China market. (previous post) The flurry of bad news has undermined confidence in Lenovo’s longtime CEO Yang Yuanqing, and I recently called on Yang to resign and be open the way for a new generation of leaders who can give the company a new start. (previous post)

At the end of the day, this particular IBM sale isn’t too surprising, since the US tech giant probably never intended to hold the shares for a long time and instead only owned the stock as part of the earlier server deal. Still, if the stock had been rising, I doubt IBM would have moved quite so quickly to dump the shares.

There’s not too much more to say about the Lenovo story at this point, mostly because the company hasn’t done much to reverse its slide. It did debut some new products last week at the world’s biggest telecoms trade show in Spain, but I haven’t heard much buzz about any of them, especially its new smartphones. I do still think we could see Yang exit at some point this year, which could finally bring some excitement back to Lenovo if it names a new leader who looks capable of resuscitating the company.

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