Lenovo’s acquisition spree pushes China outbound M&A to record January

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Lenovo’s US$2.9bn surprise bid to acquire Google’s Motorola Mobility unit – announced on January 29 – is in line to be the largest China outbound acquisition in the telecommunications sector on record.

The recent acquisition spree by the Chinese computer maker – the group also announced plans to spend US$2.3bn on IBM’s x86 server business earlier in January – helped to push China outbound M&A activity to a record US$8.4bn in January 2014, the highest January volume on record.

The acquisitions of both Motorola and the IBM unit pushed Chinese acquisitions into the US to US$5.2bn last month, up from the US$1.7bn in January 2013.

“To run a profitable smartphone business, Lenovo needs to improve Motorola’s gross margin to 13-15% and cut its expense ratio to 10% of total sales. Based on our sensitivity analysis, Lenovo should reach this target in FY17,” say CIMB analysts Jim McCafferty, Wanli Wang and Felix Pan. They also highlight the need for Lenovo to get rid of inefficient manufacturing sites.

“We are not saying Lenovo can finish restructuring these in a very short period. But even in a competitive smartphone market, we believe there is plenty of room for Lenovo to improve,” they add.

The 2014 YTD China outbound M&A adviser ranking is currently led by Credit Suisse with deals worth US$5.2bn. Bank of America Merrill Lynch follows on with US$3.1bn of deals whilst Lazard completes the top three with mandates valued at US$2.9bn.

The price Google is selling the Motorola unit for is vastly different to the US$12.5bn it paid for the business around two years ago. The sale has helped to push the value of global telecom-targeted M&A activity  to US$91.9bn last month, the second highest January on record behind 2000 and significantly up from January 2013’s US$14.6bn of activity, according to figures from Dealogic.

China inbound M&A activity dropped 25% in January to just US$2.7bn compared to US$3.6bn of announced deals that emerged in January 2013.

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