This article has been written by Varsha Aggarwal, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions), and has been edited by Oishika Banerji (Team Lawsikho).
This article has been published by Sneha Mahawar.
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In the corporate sector worldwide, the term acquisition signifies acquiring businesses from another, to get benefit of the synergies, whether it is related with valuation, market size, geographical access, assets (tangible as well as intangible), products etc. The acquisition between Lenovo & Motorola Mobility (Motorola) took place in 2014. The acquisition was announced on 30th January, 2014 and it was successfully completed on 30th October, 2014. This article discusses the acquisition between the two giants, with an emphasis on how it has changed the corporate world.
All you need to know about acquisition in the corporate world
An acquisition is a corporate restructuring process by means of which one company purchases or acquires most or all of another company’s shares in order to gain control of that company. Purchasing more than 50% of a target firm’s stock alongside other assets makes room for the acquirer company to make decisions in regards to the newly acquired assets. The acquirer company in such cases will not have to take approval of the acquired company’s shareholders. Acquisitions are a frequent process in the corporate domain and can occur either with or without the approval of the acquired company.
Objectives of acquisition
Acquisition is generally favoured by companies for the following reasons:
- Building economies of scale;
- Creating diversification in market approach;
- Greater the market share;
- Make room for increased synergy;
- Carrying out cost reductions;
- Making entry in the global market; and
- Can be used as a growth strategy.
The companies in the role : Lenovo and Motorola Mobility
Lenovo is an American-Chinese multinational technology company specialising in designing, manufacturing, and marketing consumer electronics, personal computers, software, business solutions, and related services. As of 2021, it is the world’s largest personal computer vendor by unit sales.
Motorola Mobility is also an American consumer electronics manufacturer that was formed on 4th January 2011, and solely deals in producing smartphones and other mobile devices running Android. In May 2012, Google acquired Motorola Mobility for US$12.5 billion. In a short span of time, Google decided to sell the business to Lenovo for approx. US$2.91 billion, as has been discussed hereunder.
Rationale behind the acquisition between Motorola Mobility and Lenovo
Lenovo had mentioned that, as a personal computer manufacturer, they were planning to enter the smartphone market, which was then considered to be the fastest growing industry in the world. This was one of the primary reasons why Lenovo went ahead and acquired Motorola Mobility. In addition to the same, Lenovo was willing to mark their presence in North America and Latin America, as well as a foothold in Western Europe; therefore, the acquisition was required.
With this acquisition, Lenovo intended to explore the opportunities in emerging markets around the world. Lenovo was very optimistic about the robust demand for smartphones around the world, which eventually turned out to be the fastest growing industry in the future. They also wanted to benefit from the intellectual property rights of Motorola Mobility to enter the market. Further, Lenovo declared that they will operate Motorola Mobility as a wholly owned subsidiary, with the headquarters remaining in Chicago. Through this acquisition, Lenovo became the third largest brand globally.
Terms & conditions governing the acquisition
It is interesting to note that the majority of ownership over the Motorola Mobility patent portfolio (including present patent applications and invention disclosures) and Advanced Technology and Projects group kept lying with Google itself; however, Motorola received a licence to use the portfolio of patents & other intellectual property rights. Along with the same, Lenovo was able to get the following as a consequence of this acquisition with Motorola Mobility:
- Lenovo received the brand and trademark of Motorola and its portfolio of smartphones such as Moto X, Moto G and the DROID™ Ultra series;
- Future product roadmap; and
- It also received over 2000 patent assets out of 17500+ patents.
Having a view of above terms & conditions, it can be said that the said acquisition was purely based on to reap the benefits from intellectual property rights which were in the name of Motorola or Google, as Lenovo being the manufacturer of PCs, wanted to explore its smartphone business in emerging markets such as North America, Latin America, etc.
Deal size between Lenovo and Motorola Mobility
The acquisition was valued at approximately US$2.91 billion (subject to certain post-close adjustments), which was divided into approximately US$660 million in cash and 519,107,215 newly issued ordinary shares of Lenovo stock, with an aggregate value of US$750 million, representing about 4.7 percent of Lenovo’s shares outstanding, which were transferred to Google at close. The remaining US$1.5 billion was paid to Google by Lenovo in the form of a three-year promissory note. A separate cash compensation of approximately US$228 million was paid by Lenovo to Google, primarily for the cash and working capital held by Motorola at the time of closing.
All the regulatory compliances were satisfied, including clearances from competition authorities in the U.S., China, the EU, Brazil, and Mexico, as well as the Committee on Foreign Investment in the United States (CFIUS).
Future prospects of the acquisition between Lenovo and Motorola Mobility
Lenovo was expected to sell more than 100 million devices, including smartphones and tablets, during that particular year when the acquisition took place. Motorola was enjoying a tremendous position in the mobile industry and launched its new mobile phone, the Moto 360, which was highly capturing consumer attention.
Lenovo’s management was very confident about the use of the Motorola brand and exploring the opportunities in the US market, which they probably didn’t have access to. The reason behind the deal was the emphasis on access to the US market and the earlier success of the IBM deal. On personnel aspects, Lenovo had retained 3500 employees, out of which 2800 were based in the US, who were responsible for the design, engineering, sales, and support of Motorola’s outstanding devices.
The deal was a win-win situation for both Lenovo and Google, as the latter kept ownership of the majority of intellectual property rights and got rid of the hardware business, which was not so profitable, while the former got a strategic relationship with the owners of Android.
Post acquisition status of both the companies
After the completion of the acquisition, the toughest time for Lenovo had started, as some reports stated that Lenovo was not able to revive the loss making company and slipped to 8th position from 3rd in 2016, eventually declaring an annual loss for the first time since 2009.
In 2016, their market share decreased to 2% in China, where it was 12% before the deal, and Motorola slipped to 6th position, where it was in 5th position in the US. Consequently, there was a reduction of 3200 people not involved in manufacturing, resulting in savings of $650 million in the second half of this year and about $1.35 billion on an annual basis.
Also, in a press-release dated 3rd February 2016, Lenovo stated that after reducing costs as mentioned above, it achieved its stated goals of achieving breakeven in its mobile business 4-6 quarters after the close of the Motorola deal.
There were ample reasons for the fall in sales and market size of Lenovo as well as Motorola products, which were as follows:
- Less spending for the marketing of the products;
- Launched Moto X at high price ($600-$700) which was similar to Apple;
- Keeping the two brand separately i.e Lenovo & Motorola;
- Lack of consensus between employees and management;
- For making the Motorola profitable, Lenovo introduced the Motorola’s phone in China where the things were not turned into the favour; and
- Different geo-graphical technologies that were meant for China didn’t work for the U.S.
After consideration of the above, it can be said that Lenovo overestimated its power to reap the benefits from loss making entities and focused on access in particular markets. The smartphone market is so volatile that if one leaves something or does not compete with others, then it becomes history and eventually lags behind. Of course, no one could forget the case of Nokia, which was the frontrunner in mobile phones. They didn’t change their strategy, resulting in their lagging behind and vanishing from this volatile market. To reap the benefits at the highest level in the tech industry, basically in smartphones, one has to think from every angle and be ready for the change, if required. It’s not easy to run a tech company by applying the same approach that Lenovo used in the IBM deal. On the very first day when the deal was announced, Lenovo’s share price was badly affected and fell by approx 16.5%. The share of Lenovo also got affected when employees of Motorola retrenched later. On the journey to mark its presence in the US market, Lenovo lost its presence in China as well as globally. Of course, there were several reasons behind this failure, but somehow managed the situation in 2017 to some extent. At last, Lenovo made the deductions in its costs, used the said amount in branding, etc., and achieved success. It is still running the Motorola Mobility as a going concern till date even sailing through the toughest time, be it reduction of manpower, and keep falling their market share, making losses, falling share prices in the stock market etc. Out of all odds, it proved how to run a loss making entity and turn it around to be profitable for the acquirer. As of fiscal 2022, Lenovo had robust revenue of US$70 billion and net income of US$2 billion.
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