Lenovo Group Ltd collapses on analyst downgrades after latest acquisitions

Lenovo Group Ltds shares fell the most in five years in Hong Kong after the stock was downgraded by at least five brokerages. In January, the company announced deals estimated to 5 billion dollars in order to boost its server and smartphone businesses.

The companys shares decreased by 16% and reached 8.41 Hong Kong dollars at the close of trade, cutting 2.2 billion dollars from Lenovos market value in the companys biggest decline since January 2009. Currently, Lenovo Group is considered as the biggest maker of personal computers. According to some data compiled by Bloomberg, the company was cut at UBS AG, Morgan Stanley, Jefferies Group LLC, JI-Asia Research Ltd and Kim Eng Securities Ltd.

Yang Yuanqing, Chief Executive Officer of the company, announced Lenovos two biggest deals ever within a week. The acquisitions include the purchase of the low-end x86 server unit of International Business Machines Corp. and the purchase of the Motorola Mobility unit of Google Inc. The first one is considered to deliver corporate customers to Lenovo Group, but the Motorola Mobility deal was criticized for adding an unprofitable business with decreasing sales.

Morgan Stanleys analysts said in their report posted on January 31st for Bloomberg: “We expect a negative impact on Lenovos net profit – at least in the near term – from the acquisition of Motorola Mobility. It will take some time before Lenovo turns the business profitable.”

In a report released on February the 3rd, one of the analysts working for UBS – Arthur Hsieh – described the Motorola Mobility unit purchase as a “necessary evil” that will help Lenovo Group Ltd strengthen its presence and patent portfolio in the U.S. The unit is still forecast by most analysts, including Mr. Hsieh, to lose money for the next three fiscal years, which will put some additional weight on the earnings of the company. “The potential uncertainty in the MMI deal could offset the benefit from the IBM x86 deal” Hsieh said, cited by Bloomberg.

Lenovo Group Ltd announced on January 23rd that it had agreed to acquire the low-end server unit of IBM in a 2.3-billion-dollar deal, which is expected to add a business with wider profit margins than PCs to Lenovo. Then the company announced its decision to buy Googles Motorola Mobility unit in a deal estimated to 2.91 billion dollars in cash and stock. The deal was said to add a brand established in the mobile market in the U.S., thus creating the third largest smartphone vendor in the world.

Mark Po, who is an analyst working at UOB-Kay Hian Ltd said in a report, cited by Bloomberg: “Execution risk is high and increasing competition creates concerns. The integration of Motorola Mobility is likely to drag down overall profitability.”

Lenovo Group Ltds share price crumbled by 16.40% in Hong Kong to HKD8.41, and its one-year change fell to 5.04% on the upside.