Lenovo-Sony Tie-Up Reports: Too Many Good Deals
Update: Shortly after writing this post, Sony has announced it will sell its Vaio unit to investment firm Japan Industrial Partners (JIP). I still believe that JIP could ultimately bring in Lenovo to help it operate the unit in a new joint venture or other tie-up.
Let’s begin my first post in the Year of the Horse with a look at PC giant Lenovo (HKEx: 992), which has suddenly gone into M&A overdrive with the latest word that it may be in talks to acquire Sony’s (Tokyo: 6753) PC business. I wrote just before the holiday that Lenovo might already be taking on too much with its $2.9 billion purchase of cellphone maker Motorola, which came late last month just a week after its $2.3 billion purchase of IBM’s (NYSE: IBM) low-end server business. (previous post) Individually each of these 3 deals actually look relatively smart, as all complement Lenovo’s existing businesses. But a single major acquisition is always tricky even in the best circumstances, and handling 3 such deals at the same time looks to me like a recipe for trouble.
This latest twist in Lenovo’s recent M&A binge began with Japanese media reports saying Sony was in talks to dispose of its Vaio PC unit. (English article) Those were followed by a second series of reports naming Lenovo as a potential suitor. The reports said Lenovo would take over Sony’s PC operations through the formation of a joint venture. (English article) Such an arrangement would look similar to a 2011 deal that saw Lenovo take control of NEC’s (Tokyo: 6701) Japan-based PC operations through the formation of another joint venture.
Lenovo declined to comment on the reports, while Sony issued a statement calling them inaccurate. That kind of reaction leads me to suspect that some kind of talks are probably happening behind the scenes, and there’s a strong chance — probably greater than 50 percent — that the pair will reach a deal in the next month or two. Investors also fretted about another major tie-up so soon, with Lenovo shares tumbling 16 percent in Hong Kong on the first trading day after the reports came out.
Sony’s desire to dump its Vaio unit is certainly understandable, as the PC business is rapidly fading in the face of competition from a new generation of smaller, powerful mobile devices like smartphones and tablet PCs. Sony itself has struggled in recent years due to its failure to anticipate recent technology trends, and this PC divestiture is probably part of its broader overhaul as it tries to put itself back onto more solid footing for sustainable growth.
Meantime, the deal would also make sense for Lenovo, which could quickly realize big savings by combining Vaio with its existing Japan operations that include the NEC joint venture. Such a deal would also give Lenovo yet another valuable Japanese brand, helping to consolidation its position among local consumers who tend to favor domestic names over foreign one.
The rise of a foreign company to become Japan’s top PC seller would have been unthinkable just 5 years ago, when most foreign companies still had trouble penetrating the tough market. But much has changed in the last 5 years, including a sharp decline in PC sales and also an equally rapid decline of many of Japan’s former consumer electronics superstars such as Sony, NEC, Panasonic (Tokyo: 6752) and Sharp (Tokyo: 6753).
All of that said, I’ll finish by reiterating my original assertion that a Sony-Lenovo PC tie-up might look like smart as a stand-alone deal, but looks more problematic in the context of the recent Motorola and IBM deals. Rather than chase this deal, I would advise Lenovo to focus on the IBM and Motorola purchases that will already present considerable integration challenges. But I suspect the acquisitive Lenovo will move ahead and eventually take over Vaio, setting the stage for even more integration issues in the next 2 years.
Bottom line: Lenovo’s reported talks to take over Sony’s PC business looks like a bad idea that could pose serious integration headaches so soon after 2 separate major M&A deals.
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