Lenovo Group Ltd. likely offered concessions to U.S. government officials in order to win approval for its US$1.75 billion acquisition of IBM Corp.’s PC business, but any deal is unlikely to have a negative impact on the Chinese company’s business, analysts said Thursday.
“There is certainly some agreement between these two parties,” said Helen Lau, an analyst at Celestial Asia Securities Holdings Ltd., in Hong Kong. But Lenovo is keeping the exact terms of the deal with U.S. officials under wraps, she said.
On Wednesday, Lenovo and IBM announced that the Committee on Foreign Investment in the U.S. (CFIUS) had given its approval for the sale of IBM’s PC business to Lenovo, clearing the final regulatory hurdle faced by the two companies. “This is an important step towards completion of the transaction,” said Angela Lee, a spokeswoman for Lenovo, in Hong Kong.
Lee declined to comment on whether or not the company had made concessions to CFIUS to win quick approval of the deal. “We are not commenting on the specific terms,” she said, explaining that discussions held between CFIUS and Lenovo are confidential.
Lenovo’s reluctance to discuss the specifics of its discussions with CFIUS has helped fuel investor suspicions that a deal of some sort was struck with U.S. officials to smooth the approval process for the deal, said Marvin Lo, an analyst at BNP Paribas Peregrine, in Hong Kong. But there is no indication that these concessions will hurt Lenovo’s business, he said.
One concession that was likely offered to U.S. officials by Lenovo and IBM is an agreement that restricts access for Lenovo executives to some research and development (R&D) facilities at IBM’s campus in North Carolina, Lau said. Even so, the announcement that CFIUS has approved the deal is good news for Lenovo and will help bolster customer comfort with the acquisition, she said.
Lo agreed, noting that investor confidence in the acquisition has strengthened since the deal was announced in December 2004. “Resistance from investors is not as strong as before,” he said.
Lenovo’s stock price initially sank on news of its plans to acquire IBM’s PC division, but its share price later rallied when word leaked out that CFIUS planned to conduct an extended review of the deal. That rally in Lenovo’s stock price was largely the result of expectations the review might derail the deal, Lo said. Lenovo’s stock price was up 5.4 per cent on Thursday afternoon in Hong Kong.
With U.S. government approval of the deal behind it, Lenovo now faces the challenge of making the acquisition of IBM’s PC business work. In particular, the company will have to find ways to retain existing IBM PC customers and build the Lenovo brand overseas, Lo said.
“You can’t rely on IBM’s branding forever,” Lo said, referring to the agreement with IBM that allows Lenovo to use the IBM brand on some computers for five years.