Lenovo Eyes HTC: Finally A Smart Move

By newsdoug on October 11, 2013

After years of dodgy acquisitions targeting struggling rivals, Chinese PC giant Lenovo (HKEx: 992) is finally making some acquisition bids I like, with reports the company is in talks to buy former Taiwanese smartphone superstar HTC (Taipei: 2498). This new report looks quite interesting, as it comes just 2 months after media speculated that Lenovo could make a bid for BlackBerry (Toronto: BB), another former smartphone high-flyer whose fortunes have also faded rapidly due to its failure to keep up with the latest trends. But Lenovo wisely decided to skip Canada-based BlackBerry, which would have been difficult to turn around for a number of reasons, including cultural and other structural issues due to its roots as an email specialist.

By comparison, many of those issues wouldn’t exist with HTC, which shares closer cultural ties with Lenovo due to its background as a Taiwan-based company. Lenovo would also face less technological issues integrating HTC, which rose to prominence as one of the first companies to recognize the future importance of more conventional smartphones like the ones most widely used today.

HTC’s fortunes soared on its early arrival to the smartphone sector, propelling its market value to around $30 billion as recently as 2 years ago. But its fortunes have faded almost as quickly, after the company failed to keep pace in the fast-moving industry and players like Chinese giants Huawei and ZTE (HKEx: 763; Shenzhen: 000063) entered the market. As a result, HTC’s shares have plummeted over the last 2 years, giving the company a current market value of about $3.5 billion — a price that would be relatively easy for Lenovo to digest.

All that said, let’s take a look at the latest headlines, which are all based on a report in the Taiwan edition of the Apple Daily, a newspaper known for its aggressive reporting tactics that often help it to break big stories. According to the Apple report, HTC and Lenovo have been talking about a possible deal since August. (English article) There’s not much more detail, although one report points out that HTC’s Chairman Cher Wang, who owns 3.8 percent of the company, has repeatedly ruled out selling the firm.

Perhaps Wang’s position is partly due to pride, as HTC was once considered a genius for its early entry into smartphones. But if Wang really is opposed to a sale, I would strongly advise her to reconsider her view. In my opinion, this tie-up looks like a very good fit for both companies. Lenovo was quite late coming to smartphones, but has quickly gained share in its home China market by leveraging its strong sales channels and selling cheap models.

HTC, by comparison, has much better technology and is positioned as a premium brand, not far below Apple’s (Nasdaq: AAPL) iPhones and Samsung’s (Seoul: 005930) Galaxy smartphones. While HTC has lost some of its brand appeal over the last 2 years, its name still commands a reasonable level of respect in the smartphone market. But of course that appeal is quickly fading, which is why the company might be wise to strongly consider a Lenovo deal.

More broadly speaking, this deal — if it’s really happening — seems to reflect a maturing Lenovo that is getting more selective in its acquisitions strategy. Earlier this year the company was reportedly in talks to buy the low-end server business of IBM (NYSE: IBM), though those talks later broke down due to disagreement over price. I liked that deal also as it looked like a good area to complement Lenovo’s existing product portfolio. Likewise, this new play for HTC looks like a good fit that would benefit both companies, helping Lenovo to make a strong move into the high-end smartphone space.

Bottom line: An HTC sale to Lenovo looks like a smart move for both companies, giving new resources to the former and a high-end smartphone brand to the latter.