Fri, Dec 10, 2004 - Page 10 News List

Lenovo shares drop after IBM deal

PC MARKET The Chinese computer giant's shares fell in the first day of trade since the deal on worries it may have difficulties merging its business with IBM's

By Amber Chung  /  STAFF REPORTER , WITH AGENCIES

Even as Lenovo Group's (聯想) acquisition of IBM Corp's personal computer business was lauded by a market research house, the Chinese personal computer giant's shares slumped in Hong Kong on concerns that the deal would weaken profitability.

"The acquisition is a definite win for Lenovo," International Data Corp (IDC), a Framingham, Massachusetts-based research institute, said in a report released yesterday.

Benefits

"With its acquisition of IBM's PCD [Personal Computing Division] Group, Lenovo gains access to regions outside of China with a well-respected business partner and a highly established brand," IDC said.

Lenovo, however, will face three challenges: a lack of brand recognition outside its home market, the need to match aggressive pricing in the PC market, and integration issues, including cultural issues as the US and Asian entities merge, IDC said.

Those concerns loomed large yesterday, at least, as investors and analysts appeared to be have a less confident view of the company's future.

Investor Concerns

Lenovo's shares fell yesterday on the first day of trade since the company announced the US$1.75 billion purchase of Big Blue's PC business. Trade had been suspended for the three days previous while the deal was in the works.

The shares fell by as much as 7.48 percent to HK$2.475 before recovering slightly to close at HK$2.575, a drop of 3.74 percent.

"Computers are a sunset industry," said Trevor Cheung, strategist at Singapore-headquartered DBS Vickers Securities.

"We're quite skeptical about the deal. Lenovo has not shown a good track record in assimilation in business development," he said.

JP Morgan Chase & Co also expressed concern over the deal, saying it may take time for Lenovo to merge its business with IBM's.

The purchase is "a bold but risky move," Johnny Chan, a JP Morgan analyst, wrote in a report yesterday. IBM's business "has dipped frequently into the red," he wrote.

Effects in Taiwan

In Taiwan, the Lenovo-IBM deal may deal a heavy blow to Taiwan's information technology industry. Analysts said the impact will be comprehensive over the long term.

While short-term effects are not expected to be serious, as IBM's orders to Taiwan contractors are already due, analysts said that the long-term impact will be unavoidably severe -- with secondary companies being hurt the most.

Second-tier firms could face a loss of contracts and lower gross margins given Lenovo's greater scale and increased bargaining power.

Motherboard Makers

On Taiwan's bourse, share prices of two major motherboard makers -- Elitegroup Computer Systems Co (精英) and Micro-Star International Corp (微星) -- rose yesterday on hopes that they would gain more orders from Lenovo in the future.

EliteGroup surged 6.9 percent to NT$17.1 and Micro-Star rose 6.8 percent to NT$20.4.

Current suppliers for IBM acknowledged that the negative elements of the deal outnumber the positive effects for them. Shares in Wistron Corp (緯創), a PC supplier to IBM, dropped 1.8 percent to close at NT$13.5.

Also see story:

China climbing the corporate ladder

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