Lenova Case in the Early

Lenova Case

In the early 21st century, merging manufacturers sought to cut expenses or join complementary pipelines to develop new products. In an example of the former, HP in 2001 acquired Compaq, its major U.S. rival in PCs, for $20 billion. To speed integration, managers were instructed not to redesign policies or processes from scratch, but to pick them from one side or the other. Since HP was the acquirer, most of Compaq's business practices ended up being discarded. Consolidation continued in early 2004, when PC manufacturer Gateway acquired eMachines for nearly $290 million, creating a company with a 7% share of the U.S. market.4 While Gateway pioneered its own unprofitable retail chain of stores, eMachines had profitably sold $1.1 billion of machines in 2003 through established retail channels. As a result, by 2004, approximately half of the PCs sold around the world came from five vendors: Dell led the pack with 17.9% share; HP followed with 15.9%; Lenovo, including IBM's market share prior to the acquisition, held 8%; and Acer and Fujitsu-Siemens held just over 3.5% each. Many competitors shared the remaining 50% of the PC market, ranging from large corporations with household names -- including Gateway, NCR, Sony, and Toshiba -- to small vendors.

Lenova Case

Introduction

Lenova Case

Question) what did Lenovo buy? Why did IBM sell? What are the marketing challenges of the acquisition?

Answer) a few months after negotiating the Olympics sponsorship, Lenovo in December 2004 acquired IBM's Personal Systems Division -- essentially annexing all of IBM's PC operations -- for $1.75 billion, paying $650 million in cash and up to $600 million in common stock, and assuming $500 million in IBM liabilities. Lenovo management forecasted annual operating synergies of $200 million. As part of the agreement, IBM continued to own 18.9% of the new company. The Chinese government owned 46% of the new entity through Legend Holdings. In 2005 private investors (mostly private equity firms, including Texas Pacific Group, General Atlantic LLC and Newbridge Capital LLC) took about 10%, leaving IBM with 13.2%, the original founders with 14.7%, and the public with 34.7%. The China Academy of Sciences held a 27.3% share as passive investor with no board seats. For IBM, this deal was an opportunity to shed an unprofitable operation and concentrate on consulting services (including outsourcing of enterprise it operations) and middleware solutions (software often bundled with server hardware). Deepak Advani, an IBM veteran who became Lenovo's chief marketing officer, explained the IBM rationale: "We had to decide what the right longterm play for IBM was. PCs were more and more at the fringe, with IBM moving more and more into services. A potential acquisition by Lenovo was an option, as was spinning out the division to a private equity firm. IBM and Lenovo decided to do the deal." A few years prior, a Lenovo manager explained, IBM had approached Lenovo for a potential similar transaction, which Lenovo had declined on the basis of the PC division's poor shape at the time. When IBM approached Lenovo again, it was Lenovo CFO Mary Ma (considered by Fortunate Magazine to be the world's 27th most powerful businesswoman in the world in 2005) who reviewed the deal and subsequently recommended to the top management team that Lenovo go ahead with the transaction. As part of the deal, Lenovo gained the right to use the IBM on its products for up to five years, along with two major product offerings: the well-established IBM ThinkPad laptop and ThinkCentre desktop brands. The IBM logo could only be used on IBM Think-family products. For any type of advertising, the IBM logo could only be shown on the product within the ad, not as a separate logo in the ad. The use of the IBM logo on the Think-family products would change over time. In return, Lenovo promised not to compete with IBM's services and consulting groups. IBM would continue to provide global support for the computers for five years. Finally, Lenovo also had access to IBM's 30,000-member enterprise sales team and ongoing support from partner and channel management programs.

Acquisition of the IBM PC business allowed Lenovo to move quickly into the international marketplace: the expanded firm claimed customers and businesses in 138 countries. The way IBM and Lenovo sold PCs was very complementary. In China, 70% of sales were transactional (made through business partners) and 30% by relationship (through consulting). Globally, it was the opposite, with only 30% of sales made through partners.30 Further, Lenovo's focus had been on small businesses and consumers, whereas IBM had long targeted corporate and enterprise customers. On the supply chain side, significant operational benefits flowed from the fact that components for IBM PCs were sourced in China. "On paper this was pretty much a match made in heaven," Advani recalled. "We had complementary products and client bases, and practically no channel conflict. We could use the Lenovo: broad product portfolio we sell in China and use global distribution and take products around the world." Conveying the opportunity created by these complementarities was a key message to deliver to customers. The only major overlap, though a welcome one, was in company cultures. "The two companies had similar values with a focus on meritocracy," Advani said, "since Lenovo had in part modeled itself after HP and IBM. Customer focus, innovation and trustworthiness were shared values. Even so, the potential remained for cultural and operational clashes between IBM veterans and Chinese nationals. There was also uncertainty about how IBM's existing customers -- who demanded the highest quality products and services -- would react to the new ownership arrangement. During the transition, PC competitors would surely try to dislodge loyal customers. When asked about the Lenovo-IBM PC division merger, Michael Dell was categorical: "It won't work." When was the last time you saw a successful acquisition or merger in the computer industry? Having maintained Legend's PC market leadership in China for five consecutive years, Yang was promoted to Legend Group president and CEO in 2001