Lenovo received approach from Silver Lake for PC merger with Dell; take private hangs on mobile recovery
25 AUG 2017
Lenovo [HKG:0992] received an approach from Silver Lake Partners late last year for a potential combination of its PC unit with Dell EMC’s, said two sources briefed on the situation.
The merger would have created the world’s largest maker of laptops and personal computers. HP [NYSE:HPE]currently has the biggest share of the PC market with 22.28%, followed by Lenovo with 20.48%, according to IDC Research’s first half numbers. Dell, which Silver Lake in 2013 took private in a USD 24bn deal, is in third place with a 16.46% market share.
While talks are no longer ongoing, the rationale behind a potential merger still stands, the first source said. Lenovo, Dell and HP are locked in a quarter after quarter battle for market share that depresses margins and is unsustainable in the long run. The segment is ripe for a three-to-two consolidation, he said.
Lenovo’s PC business accounts for 70% of its revenues, and is the company’s only profitable unit. Its other main units are the mobile division and its data center business, which are both struggling to make profits.
Even the PC business’ prospects are souring because of rising cost of components and pricing pressure from HP and Dell. While reporting slightly different figures, IDC and Gartner research houses agree that Lenovo’s PC business lost ground both in terms of shipments volume and market share in the April-June 2017 quarter, while worldwide PC shipments declined by 3.3% to 60.5m units over the same period, according to IDC. Traditional PCs also face strong competition from tablets and smartphones, although IDC argues that volumes are stabilizing.
Lenovo received the Silver Lake approach in September, around the time it announced its PC joint venture with Fujitsu, the second source said. Lenovo does have ambitions to overtake HP, but is more comfortable with taking small steps, rather than leaps, to get there, he said.
It was reported in May that Lenovo was considering a take private in order to transform its business model. Lenovo denied the report, but the first source said it was because the take private had been shelved by the time of publication. The company did work on a take private seriously, for as many as nine months, he said. It is unclear whether the planned delisting was triggered by the Silver Lake approach.
Lenovo, controlled by Legend Holdings, has a market capitalization of HKD 48.1bn (USD 6.15bn). It declared revenue of USD 10bn for the April-June 2017 quarter – of which USD 7bn was generated by the core PC segment. The company posted pre-tax losses of USD 69m compared to the PC business’ pre-tax income of USD 291m over the same period, according to the company's 1Q FY 2017/18 results.
The company reported an unexpected loss of USD 72m, against a USD 173m profit a year earlier, owing to deteriorating profitability in its PC and data center business, according to Morningstar Equity Research note on 21 August.
Silver Lake declined to comment. Legend Holdings said all requests for comment should be sent to Lenovo. Lenovo did not return request for comment.
Take private trips on mobile unit
Lenovo’s take private ultimately didn’t proceed because of uncertainties surrounding the company’s weak mobile unit, the first source said. The division reported a pre-tax loss of USD 129m versus USD 163m a year ago, according to the Morningstar note.
This weakness and the lack of a convincing turnaround plan made it difficult for parties to come to an agreement about the delisting, the same source said. Lenovo’s mobile unit, which includes the Motorola Mobility business it acquired from Google in 2014, operates in an environment dominated by Apple and Samsung and made more competitive by the emergence of Chinese phone makers like Xiaomi, Huawei and Oppo, the source noted.
The unit’s losses are shrinking, though, and it may break even next year, which could be a good time to revisit the take private, the second source noted. There is no concrete plan for this, however, he noted.
Lenovo is also looking to bulk up its mobile unit, as evidenced by its interest in Fujitsu’s mobile business, this source added.
The company needs to be able to craft a good future for this business but at the same time strike while its share price remains subdued, the first source said.
Lenovo’s smartphone shipments declined 3% quarter-on quarter at 11.2m units. According to a recent JPMorgan analyst report, Lenovo management does not want to exit the China smartphone market given the large demand. But management will take a more prudent approach by narrowing losses and betting on custom smartphone models to drive market share recovery.