The search giant acquired 618 million
The sale does not mean Google is negative on Lenovo, at least according to Technology Business Research analyst Jack Narcotta.
Most everyone else disagrees, however, and in this case the majority view is correct. For one thing, Google does not really need the $218 million to $221 million it expects to raise, so the decision to substantially reduce its position cannot be good news.
Worse, Google wants to build up its China presence, so a Lenovo sale has to be a no-confidence vote. Among other things, the Mountain View-based company bought Mobvoi, a Chinese artificial intelligence firm, last October and is looking to open its Google Play mobile app store there. Google execs now even talk about resuming offering searches in China. The company, citing censorship concerns, left that business in 2010.
The big tell as to Google’s view of Lenovo is that the sale closely followed the Chinese company reporting its results for the year ended March 31. Lenovo suffered a net loss of $128 million during the period. That compares with a profit of $829 million the year before. Sales were down 3%.
It was Lenovo’s first annual loss in six years. None of its three main businesses did well.
The last quarter numbers were also ugly, “dismal” in the words of Barron’s. Revenue was down 19% year-on-year and 29% quarter-on-quarter.
Lenovo can still call itself the world’s top PC maker and its data center business is okay, but the smartphone line is another story. The company recently found itself outside the world’s top-five sellers for the first time in four years. CEO Yang Yuanqing said the company had underestimated the difficulty of integrating Motorola Mobility.
And it is not just Google that has a dour view. IBM, which sold its PC business and its x86 server line to Lenovo, in March announced it was getting rid of Lenovo stock.
The sentiment on Lenovo this week looks like it was soured by a series of concurrent developments. Friday, SoftBank Group announced it was selling $1.1 billion of Alibaba Group Holding shares. That was on top of Wednesday’s announcement that the Tokyo-headquartered telecommunications company was unloading at least $7.9 billion of Alibaba stock, a figure that eventually was upsized to $8.9 billion by Thursday. By exercising its greenshoe option, SoftBank ended up dumping $10.0 billion of stock of the Hangzhou-based e-commerce juggernaut in three days.
SoftBank’s sales last week were especially significant. Masayoshi Son, its chief, and Jack Ma, Alibaba’s guiding light, had seemed to form a bond, and the disposition was SoftBank’s first-ever sale of Alibaba shares. Son bought into the company early, in 2000, and once hinted his firm would hold its block for 200 years.
Corporate boardrooms are evidently turning negative on the prospects of Chinese consumption. Yes, China’s consumers have been disappointing many people in recent months and will continue to do so, but let’s unpack this tale of two companies.
First, SoftBank, I think, made the right decision. Alibaba has been continually overhyped by analysts, the company is under investigation, management has an acquisition strategy that lacks focus and is generally ill-conceived, expansion into other countries should be much further along than it now is, and competitor JD.com will eventually get some love from analysts.
Ma has a genius for promotion and deserves credit for building a great business, but in a year or so it will become evident that he has run up against the limits of what can be achieved in China with his model.
If you want a mental graphic portraying Alibaba’s future, think of Gulliver tied down by the Lilliputians.
And, by the way, some of those angry little people in this graphic are accountants and investigators from the Securities and Exchange Commission.
Lenovo, of course, is not as flashy as Alibaba. Despite some comments in the financial press, the company looks relatively well run. And its management understands investor relations. Yang gave up his bonus in light of the company’s recent problems.
Lenovo’s problem is that it is in China in difficult businesses. In the ultra-competitive Chinese smartphone market, for instance, it faces fast-rising OPPO Electronics, now in second place, and it is also behind first-place Huawei Technologies and Xiaomi, now in third. Lenovo is sinking, not helped by the Motorola misstep.
And smartphones for Lenovo were not an unimportant sideline. After all, management decided to deploy profits to increase smartphone sales. This particular maneuver was a mistake, however, because Lenovo now looks to be short of cash, as James Yan of Counterpoint Technology Market Research points out.
Smartphones aside, there is a lot to like about the way Lenovo is run. As Jack Narcotta, the analyst, notes, “Even though they are selling less, they’re getting more profit for the ones they are selling and, in a declining market, that’s OK.”
Of course, if you don’t have to be in China, it’s hard to justify buying or holding a company in Lenovo’s position. Yet many analysts like the country’s prospects, both short- and long-term, so if you agree with them Lenovo appears oversold after Google’s decision last week to bail.
Follow me on Twitter @GordonGChang and on Forbes. And find much more here.
