China's Lenovo Group Ltd, the world's number two PC maker, is in detailed discussions on a smartphone venture with NEC Corp, a Japanese partner in PCs whose mobile business is faltering, as it eyes partnerships and acquisitions to expand in high-growth markets.
Lenovo has been aggressively forging deals over the past eight years to gain prominence in PCs, and that strategy is now shifting to smartphones, tablets and enterprise computing as PC shipments decline.
Lenovo CFO Wong Wai Ming and other executives met on Tuesday with investors in Singapore to drum up interest in a bond issue that investors say could raise $500 million or more and help to fund a renewed acquisition drive, possibly including IBM Corp's low-end server business.
"It has significant equity and is a net cash company. They can easily raise $3 to $4 billion for acquisitions, including $1 to $1.5 billion debt," said analyst Warren Lau of Maybank Kim Eng.
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Lenovo said on Tuesday that it was in talks over a smartphone venture, without naming its potential partner, while a source familiar with the situation said NEC and Lenovo had moved into detailed discussions on a joint venture although nothing had been finalised.
NEC has been in talks with Lenovo since early this year on a possible sale or tie-up involving its mobile unit, according to media reports and a source familiar with the discussions.
An NEC spokesman declined to comment on Tuesday on the possibility of a mobile joint venture with Lenovo but acknowledged the troubles that unit is facing.
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"Our mobile phone business is in a difficult state and we acknowledge that we need to decide on a direction for the business. For that, we are considering various opportunities."
Lenovo, which is nearly neck-and-neck with Hewlett-Packard Co as the top global PC maker, has spent billions of dollars over the past few years to strengthen its personal computer business. It purchased Brazilian electronics maker CCE last year, Germany's Medion in 2011 and IBM's PC business in 2005.
Partnerships and Acquisitions
Lenovo will finish up its investor roadshow for its first-ever global bond on Wednesday in London, after which it will decide whether to go ahead with the issue, and then set the size and terms.
Like other tech companies, it wants to take advantage of low interest rates and has said it will use the proceeds for working capital, strained by the move into consumer electronics, and for acquisitions, although it has given no details.
The company is cash-rich, with free cash flow around $1.6 billion at the end of 2012, but it would still need to raise funds for a big acquisition. IBM is seeking $5 billion or more for its low-end server business, according to media reports, but Maybank's Lau said Lenovo should pay no more than $4 billion.
"The IBM server acquisition makes a lot of business sense," Lau said.
"The enterprise business is growing at double-digit rates while the PC business is stagnating and as a result of this possible buyout Lenovo's exposure to PCs will fall to 70 percent from 80 percent."
Under an aggressive expansion drive led by Lenovo Chairman and CEO Yang Yuanqing, 48, Lenovo has grown into the second-largest smartphone maker in its home market in China.
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Apart from NEC's mobile phones and IBM's low-end servers, Lenovo has been rumoured in the market over the past year to be interested in acquiring Nokia Oyj and BlackBerry .
Jefferies analyst Ken Hui said, however, that security concerns that have dogged Chinese telecoms deals in North America may compel it to seek a partnership arrangement with BlackBerry, while he considered a Nokia deal unlikely given the overhead.