Lenovo Group, the world's No. 3 maker of personal computers, wants to take over a mid-tier PC manufacturer valued at about $800 million to bolster a barely profitable European arm,
sending its shares almost 3% higher.
Lenovo's shares, which have seesawed since the firm released a sterling set of quarterly earnings, stood 2.2% higher on Wednesday after the firm revealed it hoped to buy rival Packard Bell to strengthen its European operation.
Lenovo, just starting to turn around its U.S. operations, said on Tuesday it was in exclusive talks to buy PC maker Packard Bell BV -- which claims third place in the European consumer computer market but which analysts estimate is ranked seventh or eighth -- from principal owner John Hui.
If successful, the deal would allow the Chinese giant to quickly capture market share in a region where it is ranked sixth and barely profitable, while it continues to digest and revive a global PC business bought from IBM in 2005, analysts say.
"The acquisition is positive for Lenovo, as Packard Bell can help Lenovo penetrate the European consumer segment quickly. The consumer segment accounts for about 40% of the total EMEA market but Lenovo has almost no presence in this segment," said Cazenove analyst Zhao Xin.
But it would also expose the firm to an intense battle for consumers between the likes of Dell , Hewlett Packard and aggressive Acer.
Most analysts would not be drawn so soon on Packard Bell's price tag nor on bottom-line impact if a deal goes through. But Deutsche estimates the European firm chalked up between 1.5 billion and 2 billion euros (US$2.8 billion) of 2006 revenue.
"Based on an assumption that Packard Bell's topline is 1.5 billion euros, net margin is 2.5 percent and 15 times PE, the deal is estimated at $700-800 million," said Zhao.
Price Range Indeterminate
But the price tag could change dramatically depending on its undisclosed bottom line. "Its move deeper into the consumer markets of the U.S. and Europe could depress margins. We believe HP and Acer remain very aggressive in building market share," Deutsche Bank's Alan Hellawell wrote. "We are also wary of the magnitude of the integration challenges."
Lenovo, one of a handful of Chinese companies trying to forge a global brand by investing abroad, dropped to fourth globally in 2007's first three months but reclaimed the No. 3 spot from Acer a quarter later by riding an upswell of corporate demand.
It commanded 8.3% of the global market, according to research house IDC, ahead of Acer's 7.2% but just slightly more than half of second-placed Dell's 16.1%.
"We believe the deal should help Lenovo to maintain its global No. 3 PC vendor position in the near term and strengthen Lenovo's European operation, which is relatively weaker than its other regions," Goldman Sachs wrote on Wednesday.
On Tuesday, the Hong Kong Economic Journal reported that Lenovo and Taiwan's Acer had vied for Packard Bell, which Hui bought from NEC in October of 2006. Lenovo denied Acer was involved.
Lenovo's shares soared 61% in the second quarter, versus the Hong Kong's Hang Seng Index 10% rise, as investors cheered improvement in its international business.
But the stock might be looking pricey: it's trading at 20 times estimated earnings, versus HP's 17, Acer's 12 and Dell's 21, according to Reuters data.
The acquisition "will initially be positive to the stock", said Conita Hung, head of equity markets at Delta Asia Financial. "However, there are still concerns about the purchase price and how they will consolidate."
To drive future sales to consumers, the company now plans to launch a range of notebooks in January and desktops in March or April, rounding out its product range. Lenovo's PCs are tailored primarily for corporations and governments.
Lenovo is now negotiating the Packard Bell deal with Hui, also known as Lap Shun Hui, the former owner of eMachines, another computer maker, according to Packard Bell.