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1、Table of Contents1. Introduction31.1 The Chinese M&A situation31.2 Purpose32. Brief summary about the case42.1 Introductions about Lenovo42.2 Case Summary53. Important Factors Analysis63.1Synergistic Effect63.2 Integrated the human resources and resolved the labor cost problem successfully63.3 Resol

2、ved the difficulty of blending two brands63.4 Well-designed corporate management plan74. Assumed Risk Analysis74.1 Deal risks74.2 Cave-out risks84.3 Integration risks: cultural and operational94.4 Political risk104.5 Brand risk105. Solution to the risks115.1 Original deal: pre-private equity involve

3、ment115.2 Final deal: private equity firms get involved126. Recommendations136.1 Further Research and Development136.2 Culture Conflict Problem136.3 Attract New Customers146.4 Internationalize Achievements146.5 Positioning Correctly146.6 Rationalize Their Pricing Strategy146.7 Grasp Opportunities157

4、. Chinese restrictions on foreign M&A activities in China and the rationale behind157.1 Qualifications of acquiring firm157.2 Decentralization of authority167.3 Classified approval177.4 Asset selling restrictions187.5 Conclusion198. Reference201. Introduction1.1 The Chinese M&A situationCurrently, F

5、oreign capital M&A is the main form of foreign direct investment. Chinas making use of foreign investment has long been focused on the manufacturing industries which take up approximately 60%-70% in all and assumed the growing tendency in recent years. Multinationals have started to march on large-s

6、cale equipment and manufacturing industry in China. At present, within the world top 10 biggest projects mechanical companies had 9 entered into China comprehensively with their merger emphases on our leading project mechanical and electric apparatus enterprises. (Qin, 2007)Along with Chinas opening

7、 up to the outside world and the influence of transnational M&A tide, there presents some new changes in multinational investment methods to China. The main change is from the joint capital, cooperation to sole ownership plant, then carrying out on a large scale M&A practice to our potential bog out

8、standing enterprise.1.2 PurposeThis essay is to analyze the methods used and major risks in Chinese M&A through the Lenovos Acquisition of IBMs PC Division case.2. Brief summary about the case2.1 Introductions about LenovoLenovo Group Limited (SEHK: 0992) is a Chinese multinational computer hardware

9、 and electronics company with its operational headquarters in Morrisville, North Carolina, United States and its registered office in Hong Kong. Its products include personal computers, tablet computers, mobile phones, workstations, servers, electronic storage devices, IT management software and sma

10、rt televisions.Lenovo has operations in more than 60 countries and sells its products in around 160 countries. Lenovo was founded in Beijing in 1984 and incorporated in Hong Kong in 1988 under its previous name, Legend. Lenovo is listed on the Hong Kong Stock Exchange and is a constituent of the Han

11、g Seng China-Affiliated Corporations Index.In the 1980s, with market reforms in progress, the Chinese government hired Liu Chuanzhi to distribute imported computers. Liu founded Lenovo in 1984 with a group of ten engineers in Beijing with 200,000 yuan. In 1996, Lenovos market share went up to the fi

12、rst place in China, and it launched its first PC. It developed rapidly since then and in 2000 it became a constituent of the Hang Seng China-Affiliated Corporations Index. In 2003, the three business linesmobile phone, IT and the internet unit lost over hundred million Hong Kong dollar. Even in the

13、line of the PC, the profitable unit of Lenovo, it was forced to compete with the DELL and HP. The fact that it is the global market it owned made DELL strong inspire Lenovo to focus on its comparative advantages operational areathe PC and turned to the internationalization strategies.After nine year

14、s development, Lenovo is the worlds largest PC vendor by 2012 market share (takeover Hewlett-Packard) and markets the ThinkPad line of notebook computers and the ThinkCentre line of desktops.2.2 Case SummaryAs early as in 2000, IBM had already expressed its willingness to sell their PC unit to Lenov

15、o. The reason why IBM sell its prestigious PC unit, according to the financial report submitted by the IBM in the year 2004, the PC division lost 397million dollar in 2001, 171 million in 2002, 258 million in 2003, and 139 million in the first half of the 2004. For the consecutive years, IBM was in

16、a lost position. The active pricing strategies of enterprises such as Dell, Hewlett-Packard (HP) had a serious impact on the sales of the IBM PC; For IBM, the PC unit is tasteless. So that IBM is to leave unprofitable PC market, and put in more effort in the lucrative high-end servers, software and

17、IT services business. But the acquisition price then is up to 4 billion US dollar, Lenovo is unable to pay that mush. Besides, Lenovo played a dominant role in the China mainland market then, so it refused this proposal.In May 2002, IBMs CEO Sam Palmisano visited Lenovo, the two sides to revisit the

18、 issues. Lenovo is then enthusiastic about the implementation of diversification strategy, but also aware of the importance of the internationalization, so its possible for later further negotiations. From the end of 2003 to December 8, 2004, this merger lasted an entire year.December 8, 2004, Lenov

19、o officially announced the completion of the acquisition of IBMs global PC business. Lenovos acquisition of IBMs personal computer division accelerated access to foreign markets while improving both its branding and technology. Lenovo paid $1.25 billion for IBMs computer business, including $650 mil

20、lion in cash, 600 million shares and an additional $500 million of IBMs debt. This acquisition made Lenovo the third largest computer maker worldwide by volume then. After the acquisition, Lenovo will take over IBMs notebook and desktop business and other related business worldwide, including its cu

21、stomers, distribution and marketing channels.3. Important Factors Analysis3.1Synergistic EffectThe key of a successful M&A case is whether the mergers and the merged company can complement other advantages and make one plus one bigger than two. The merging of Lenovo and IBMs personal-computer depart

22、ment has great synergistic effect in many respects. Including, the synergy of businesses, the synergy of distribution channel, the synergy of the brand and management and the synergy of cost saving3.2 Integrated the human resources and resolved the labor cost problem successfullyAt first, there was

23、tremendous difference between Lenovos and IBMs human resources strategy. The major problem was the large wages gap between Lenovo and IBM, the wages of previous IBMs employees made up a great cost. In order to retain the previous IBMs employees and reduce the discontent of Lenovos employees, Lenovo

24、gave himself three years transitional period and formed a unified pay system within three years.3.3 Resolved the difficulty of blending two brandsAs many companies seek growth through the development of new products, co-branding strategy provides a way to develop new products. Lenovo planned to util

25、ize the well-known IBM brand to explore the international market hence increase the revenue. However, combining two brands may cause brand meaning to transfer in ways that were never intended. Signing an agreement to retain the right to use the trademark of IBM for five years, Lenovo can use this bu

26、ffer time to make the global users to recognize its name. In 2011, Lenovo overtook Acer and became the third largest PC supplier globally. We can see that Lenovo has gradually built its reputation in the international market.3.4 Well-designed corporate management planAfter the acquisition, Lenovo ex

27、perience a tough period, with serious financial problems as well as plunging stock price. Faced with these problems, Chuanzhi Liu designed an accurate plan with two steps to make Lenovo achieve success in the acquisition. Owing the accurate action, Lenovo achieved brilliant success in profit again i

28、n 2010 as it shows in the graph1.The profit index of Lenovo in 2009, 201020092010EPS（HK cents）-19.97 10.37 Net income（million HKD）-1765.83 1009.07 ROA（%）-3.42 1.44 ROE（%）-17.27 8.06 4. Assumed Risk Analysis4.1 Deal risksThis section highlights the key risks facing each party. While the industrial lo

29、gic of theLenovo-IBM PC was clear that the transaction was fraught with risk. Due to the complex, crosscontinental nature of the deal and the predictable political angst spurred by the announcement, the transaction left the involved parties exposed to significant financial, operational and reputatio

30、n risk.4.2 Cave-out risksEven on a stand-alone basis, the carve-out of IBM PC from IBMs operations would pose significant challenges. According to Winston Wu, a member of the TPG deal team, “The carveout of IBM PC is the most complex carve out ever attempted by a private equity firm” IBM PC was not

31、organized as a separate stand-alone unit with its own functions within IBM. Rather, IBM PC benefited from centralized functions run by its parent, such as global procurement, sales and distribution as well as back-office support such as accounting, finance and human resources.These intricate links w

32、ith the parent company added to the difficulty of structuring a share purchase agreement. In order to solve the issue of the IBM PCs deep dependence on IBM, the transitional services agreements became important components of the negotiations and the transaction. 4.3 Integration risks: cultural and o

33、perationalIn addition to the issues specific to a carve-out from IBM, the combination of a Chinese and U.S. firm posed a host of additional risks. For example, the cultural and operational integration challenge was significant and could have potentially derailed the deal. The two companies had disti

34、nct cultures: IBM PC was an established global business with a Western management mindset, whereas Lenovo was a purely China-focused company run by local Chinese entrepreneurs. Further, according to IBM accounting, its PC division had been operating at a loss for years. Lenovos management had very l

35、imited experience operating outside China, and there was a risk that the key US management needed to run the international portion of the combined business might leave because of potential cultural clashes. As the Economist noted, “Lenovo might make things worse, given cultural differences between A

36、mericans and Chinese, big differences in pay and the need for interpreters at every meeting.” Indeed, cultural differences have plagued Chinese-Western mergers in the past. Vincent Yan, finance director of TCL, which merged with the French television manufacturer Thomson, has admitted that “the cult

37、ural gap proved wider than expected.”The integration also presented several operational risks. It would not be an easy task to subsume a global icon operating in 160 countries within a company one third its size that operatesin only one country. Not only would the challenge of combining the two busi

38、nesses in their current format prove difficult, but also the planned restructuring of the supply chain and manufacturing added significantly to that risk. In particular, successfully executing two major cost initiatives fundamental to the industrial logic of the acquisition was far from assured. Ach

39、ieving preferential terms from suppliers and fully leverage Lenovos low cost infrastructure to reduce the global operating costs very ambitious goals that had never before been attempted by a Chinese company.20 According to Jeannie Chung at CSFB, “so far, no Chinese company has successfully turned l

40、oss-making overseas assets into a profitable business. Lenovo could hardly be an exception.” An additional question was what would happen to Lenovo after the negotiated services agreements with IBM had disappeared.4.4 Political riskWhen the deal was announced there was a loud cry by politicians in t

41、he United States. At the outset, there seemed to be a risk that the deal would not get approval. Several senior Congressmen lobbied against the deal, claiming that it would “allow the Chinese government to acquire sensitive American technology, and potentially, use IBMs facilities to spy for the Chi

42、nese armed forces.” They cited the fact that the Chinese Academy of Sciences was a major shareholder of the firm. These very same Congressmen wrote to the Treasury Secretary, John Snow, to argue that “the deal may transfer advanced US technology and corporate assets to the Chinese government.” While

43、 many viewed these activities as shrill political posturing, the Committee on Foreign Investment in the United States extended its routine 30-day investigation by45 days to perform a more thorough investigation. In addition to approval risk, the key players were concerned that Lenovo-IBM PC would lo

44、se IBM PCs U.S. government contract, which represented approximately 7% of total IBM PC sales.4.5 Brand riskJust like there was a worry that a potential political backlash in the US and an attack by IBM PCs competition could negatively affect sales, there was a concern that the transaction would res

45、ult in a degradation of the “ThinkPad” brand around the world. Indeed, there was a risk in combining the “high-end” IBM brand with the “lower end” Lenovo brand. How would consumers react to the change of control? IBM Thinkpad stood for quality and “made in America” (even though most production took

46、place offshore even under IBMs ownership). Furthermore, there was a second degree of brand risk, five years after the transaction when Lenovo would lose the right to use the “IBM” brand. Lenovos lack of brand recognition outside of China could requirethat it spend more than expected on marketing pro

47、mote its brand in anticipation of the expiration of the five-year term.5. Solution to the risksSatisfying all parties proved difficult and demanded a complex deal structure. According to Andrew Right, a member of the Goldman Sachs team that advised Lenovo in the transaction: “This transaction stretc

48、hed the negotiators on both sides of the table to the limitthe complexity of the deal forced us to be extremely innovative in the structuring of the transaction.” Also, given the sensitivity of the discussion some of IBM PCs key managers were kept out of the negotiations in order for them to preserv

49、e a good relationship with their new colleagues at Lenovo following the transaction. The proposed new CEO of Lenovo-IBM PC, Steve Ward, “was kept outof the acrimonious negotiations in order to facilitate the post-merger cultural integration.”5.1 Original deal: pre-private equity involvementThe priva

50、te equity firms were not involved in the original deal agreed in December 2004. According to the original agreement, Lenovo would acquire the IBM PC business, including the desktop and notebook product lines, corresponding R&D and manufacturing facilities. The total consideration of the transaction

51、was US$1.25 billion plus the assumption by Lenovo of approximately US$500 million of working capital related liabilities (not considered part of the enterprise value since the Company has negative net working capital). Lenovo would pay the consideration in US$600 million of equity and US$650 million

52、 in cash, resulting in an 18.9% ownership in the new entity for IBM. The cash consideration would be paid with US$150 million from internal sources and US$500 million from a bridge loan provided by Goldman Sachs.5.2 Final deal: private equity firms get involvedThe original deal was changed quite dra

53、matically when the private equity firms became involved in the spring of 2005. TPG and GA paid US$350 million in a convertible preferred equity instrument that upon conversion equaled 10.24% of Lenovo-IBM PCs share capital. In addition, the private equity firms received warrants that if exercised am

54、ounted to an additional 2.63% of the firms fully diluted share capital. As a result of the involvement of the private equity firms, IBM would get a larger portion of the consideration in cash and its resulting equity stake in the Company would be decreased from 18.9% to 8.8%. IBM got approximately U

55、S$800 in cash and Lenovo-IBM PC common shares representing a value of US$450 million, instead of US$600 million (based on the HK$2.675, the closing price of Lenovos shares on the last day of trading prior to the December 2004 announcement). Table A provides a summary of the pre- and post transaction

56、 ownership structure. Table A: Pre- and post-transaction ownership structureSource: Lenovo326. Recommendations6.1 Further Research and Development Lenovo cannot survive after the M&A if it cannot provide valuable product, so it should focus on further research and development. Lenovo should adhere t

57、o its innovative corporate culture. Lenovo Group has established a R&D team which has three core research locationsChina, The US and Japan. And the team is closely linked with the business department. Within Lenovo group, they called this huge system ”global innovation triangle”6.2 Culture Conflict

58、ProblemAfter the acquisition, Lenovo was faced with new challenge, that is, the culture conflict; the difference between the two countries may force the former employees of IBM to leave Lenovo. So that Lenovo should respect the autonomy of overseas R&D centers. Powers are returning to the engineers, and even the appearance of the new headquarters of Lenovo in the Raleigh, US, are designed by the senior director David and his American team, and its totally impossible under IBMs rule.