Seeing What’s Behind Lenovo’s Motorola Deal

(Originally published here.)

Less than two years after buying Motorola Mobility Holdings LLC for more than $12 billion, Google Inc. isselling the smartphone manufacturer to Lenovo Group Ltd. for about $3 billion. The division has cost Google hundreds of millions of dollars in losses each quarter since the search giant bought it, so it’s no surprise that Google is eager to sell.

The mystery is why Lenovo is buying — especially right after the Chinese electronics manufacturer took the low-end x86 server business off International Business Machines Corp.’s hands. And it certainly doesn’t seem like profit is its main motive: Lenovo has pledged to continue making Motorola-branded phones out of theexisting factories in Fort Worth, Texas, so it’s not as if it has a plan to save money by shifting production to lower-cost countries.

Acquiring the discarded leftovers of otherwise successful companies may not look like a great strategy, yet it’s one that Lenovo has repeated before, though with mixed results. From 2001 through 2004, Lenovo’s margins were consistently about 5 percent. Then in May 2005 it bought the ThinkPad line of computers from IBM for $1.75 billion. Margins have hovered around 2 percent ever since. Lenovo seems to have made up the difference by boosting volume and net income is now almost six times more than it was in 2004.

Perhaps the puzzling part of the deal from Lenovo’s perspective is that Google is only ditching the piece of Motorola that was a money-loser. According to a blog post by Larry Page, Google’s chief executive officer, “Google will retain the vast majority of Motorola’s patents.” Depending on how Google values that intellectual property it may be able to avoid any write downs, especially when you consider the pieces of Motorola it has already sold. Google also still sells smartphones and tablets under itsNexus brand, so it isn’t as if the company has exited the business of selling hardware.

One possible rationale for the deal is that Lenovo’s shareholders may have priorities beyond immediate profitability. According to data compiled by Bloomberg, about a third of Lenovo is owned by Legend Holdings Ltd. According to its website, the Chinese conglomerate was founded in 1984 with the help of funding from the Chinese Academy of Sciences, which in turn was created by the Chinese communists in 1949. This doesn’t mean that Lenovo is an arm of the government but it might explain the company’s relentless pursuit of advanced technology even if it comes at the expense of margins.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)

To contact the writer of this article: Matthew C. Klein at mklein62@bloomberg.net.

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net.

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About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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