Lenovo Group Limited is a Chinese transnational computer hardware and electronics company. Its operational headquarters are located in Morrisville, North Carolina, United States and its registered office is in Hong Kong. It produces personal computers, tablet computers, mobile phones, workstations, servers, electronic storage devices, IT management software and smart 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 selected as a constituent stock of the Hang Seng China-Affiliated Corporations Index. In the 1980s, when market reforms were in progress, the Chinese government hired Liu Chuanzhi to distribute imported computers. In 1984, Liu founded Lenovo with a group of ten engineers and 200,000 yuan in Beijing.
Their first significant effort to import televisions was failed. The group could rebuild itself within a year by carrying out quality checks on computers for new buyers. Shortly afterward, Lenovo started developing a circuit board that would allow IBM-compatible personal computers to process Chinese characters. This product was Lenovo’s first major success. Lenovo started to manufacture and launch computers tagging its own brand name in 1990. In 1996, Lenovo’s market share went up to the first place in China, and it launched its first PC. Since then, it developed rapidly and in 2000 it became a constituent of the Hang Seng China-Affiliated Corporations Index.
However, Lenovo’s diversification strategy and the competition with the computer manufacturers around the world made Lenovo to loss position. In 2003, the three business lines which include mobile phone, IT and the internet unit lost over hundred million Hong Kong dollar. Even in the line of the PC, the most profitable unit of Lenovo, it should compete with the DELL and HP. The fact that the global market made DELL stronger encouraged Lenovo to focus on its comparative advantages of operational area, the PC and go back to the internationalization strategies.
After nine years, Lenovo became the world’s largest PC vendor in 2012 marketing the ThinkPad line of notebook computers and the ThinkCentre line of desktops. Lenovo could success because of its long-term concentration on emerging markets and successful overseas M&As suffering from a low profit margin in the PC business and intense competitions from tablet PCs and smart phones, the company is initiating to diversify its businesses. The most famous M&A case is the merger and acquisition of IBM’s PC unit. In fact, in early 2000, IBM had already represented its willingness to sell their PC unit to Lenovo. Why would IBM sell its renowned 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 successive years, IBM was in a lost position. The active pricing strategies of companies such as Dell, Hewlett-Packard (HP) had a serious impact on the sales of the IBM PC which means, for IBM, the PC unit is “tasteless”. Therefore, IBM was to leave unprofitable PC market, and put in more effort in the profitable high-end servers, software and IT services business.
However, the acquisition price then is up to 4 billion in US dollar, Lenovo was unable to afford that much. Moreover, Lenovo played a dominant role in the market of mainland China then, so it didn’t accept this proposal. In May 2002, IBM’s CEO Sam Palmisano visited Lenovo to revisit the issues of the two sides. Lenovo had then enthusiasm about the implementation of diversification strategy, but also aware of the importance of the internationalization. Hence, it was possible for later further negotiations.
From the end of 2003 to December 8, 2004, this merger continued for an entire year. December 8, 2004, Lenovo publicly announced that the acquisition of IBM’s global PC business is complete. Lenovo’s acquisition of IBM’s personal computer division accelerated entry to foreign markets while improving both its branding and technology. Lenovo paid $1.25 billion for IBM’s computer business, including $650 million in cash, 600 million shares and an additional $500 million of IBM’s debt.
This acquisition made Lenovo the third largest computer manufacturer in the world by volume then. After the acquisition completed, Lenovo wanted to take over IBM’s notebook and desktop businesses and other related businesses including its customers, distribution and marketing channels worldwide. With regard to the purchase of IBM’s personal computer division Liu Chuanzhi said, “We benefited in three ways from the IBM acquisition. We got the ThinkPad brand, IBM’s more advanced PC manufacturing technology and the company’s international resources, such as its global sales channels and operation teams. These three elements have shored up our sales revenue in the past several years.”
Besides, Lenovo obtained the 5-year-right to use the brand name of IBM. Acquisition agreement also point that the executive candidate: Stephen Ward (the senior manager of IBM) became the CEO and board directors of Lenovo group. Whereas after the M&A, Lenovo faced various serious problems such as culture differences and the integration of human resources, high salary costs, supply chain issues and the financial distress. However, Lenovo eventually solved the problems and dramatically survived.
1. To solve the problem of the large gap of the salaries between the
employees of the Lenovo and the employees of the IBM PC Unit, Lenovo decided not to change the salary of the employees of IBM within 3 years and agreed to transform their stock options into the stock options of Lenovo. And for the three years of time, Lenovo will adjust and establish a unified and equitable salary system. 2. To solve the difficulty of the integration of the brand, Lenovo required at least a five-year-time to launch an independent and prestigious brand. With the agreement between Lenovo and IBM, Lenovo can use the brand name of IBM for five years.
After that, Lenovo can only use “ThinkPad” and “ThinkCentre”. 3. To solve the supply chain issues, by the end of the year 2005, Lenovo had invited William J. Amalio to charge the position, the CEO of the Lenovo Group, replacing the former CEO, Stephen N. Ward. Amalio made a great effort to optimize and improve the international supply chain system of Lenovo during his tenure. Lenovo started the “Reconstruction project of the supply chain worldwide” through developing the infrastructure of not only the IT but only the efficiency of the supply chains. 4. The financial distress was a huge obstacle for the progress of Lenovo which carries seriously negative effects.
When the acquisition is complete, the net profit of Lenovo decreased significantly from 1092 million Hong Kong dollar in 2005 to 216.528 million Hong Kong dollar in 2006. And the EPS(Earnings per share) of Lenovo also dropped from 14.97 HK cents to 1.95 HK cents. The loss of revenue was due to the loss of the market share of the IBM PC unit. After every possible works, in 2007, Lenovo has basically completed the pre-integration of the PC unit. And the financial indicators seemed all getting better. The profit of Lenovo increased to 1256.88 million Hong Kong dollars, and its EPS increase to 14.35 in 2007. However, Lenovo should endeavor to get a stable condition before they had.
In 2008, Lenovo showed the worst financial reports since its acquisition of the IBM PC unit. The profit was only 23.3 million dollar which is 78% of decrease compared with the profit last year. At Feb, 5, 2009, Lenovo announced a loss of 97 million dollar. And at the same time, Lenovo found that it had lost the dominant market share in mainland China. After bearing a really tough time of its own, Lenovo made a right decision during this period of time. Liu’s comeback must be the most correct one.
Liu adjusted the company’s business strategies to maintain a desirable share of domestic sales and continue to expand global overseas markets. Lenovo Group immediately reduced its losses in 2010 and finally, achieved profitability and got a profit of 1,009 million Hong Kong dollar in fiscal year of 2010. Lenovo eventually got survived.
1. The critical successful factors that are the focus of the successful M&A activities 1.1 Synergistic Effect
The key of the successful M&A case is whether the merging companies and the merged companies can complement other group’s advantages and make one plus one bigger than two or not. The merging of Lenovo and IBM’s personal-computer department has great synergistic effect in many aspects. It made the remarkable positive value in the synergy of businesses, the synergy of distribution channels, the synergy of the brand and management and the synergy of cost savings.
1.2 Integrated the human resources and resolved the labor cost problem successfully At the first time, there was tremendous difference between Lenovo’s and IBM’s human resources strategies. The major problem was the large salaries gap between Lenovo and IBM, the salaries of previous IBM’s employees made great cost expenses. In order to retain the previous IBM’s employees and reduce the discontent of Lenovo’s employees, Lenovo gave itself three years of transitional period and formed a unified and equitable paying system within three years. 1.3 Resolved the difficulty of blending two brands
Many companies try to increase their sales amounts and seek growth of revenue by developing new products. And the co-branding strategy is one of the effective methods to provide a way to produce new and profitable products. Lenovo planned to utilize the well-known brand name of IBM in order to access to the international market hence increase the revenue. However, merging two brands caused brand meaning to transfer in unexpected ways that were never intended.
Through signing an agreement to obtain the right which is allow Lenovo to use the trademark of IBM for five years, Lenovo could use the buffering time to make the global computer users worldwide to recognize its half-new name. In 2011, Lenovo took over the Acer and became the world third largest PC supplier globally. We can see that Lenovo has gradually built its reputation in the international market around the world so far.
1.4 Well-designed corporate management plan
After the acquisition, Lenovo experienced a tough time in transition, with serious financial hardship as well as plummeting the price of stock. In order to resolve these problems, Chuanzhi Liu designed an accurate scheme with two steps forward to make Lenovo achieve success in the acquisition. Owing the accurate action, Lenovo could eventually break the stalemate and achieve brilliant success in profit again in 2010 as it shows below.
Net income（million HKD）
The profit index of Lenovo in 2009, 2010
2. The summary of lessons learned which made the factors successful 2.1 Synergistic Effect
There are several synergistic effects in the case of Lenovo M&A IBM PC department. Complementing IBM’s and Lenovo’s advantages, Lenovo are able to increase its market share and the revenue, reduce the cost and finally manage the firm to be effective in full operation. Firstly, one of key driving forces for the successful M&A was that IBM has already penetrated the global large enterprises’ market whereas Lenovo have relatively the small enterprises’ market in terms of scope of their activities and the consumers’ market.
However, after the merge with IBM PC department, Lenovo expands its business share thus increases the bottom line. Secondly, it was the synergy of distribution channel. Lenovo has an internationalization strategy that “Attracting-In” and “Walking-Out” while IBM which is a globally mature large entity has tones of successful distribution channels all over the map and the corresponding sales teams and managing groups. By merging IBM’s PC department, Lenovo is able to combine the domestic and international distribution channels and it gains the international market at a relatively cheaper cost. At the third place, the synergy of the brand and management.
After merging, Lenovo processes IBM’s THINK series brand and their patents, two R&D centers and retention of the previous IBM’s top executive board. Lenovo maintains the competitive advantages of IBM’s PS department, the leading R&D as well as the product innovation capability. At the forth place, the synergy of cost saving. Lenovo did not have competitive advantages regarding of invention cycle and the integration of the whole industry chain. After merging, Lenovo cut IBM’s money-consuming outsourcing businesses, and then optimize its supply chain.
As a result, save a great deal of cost. 2.2 Integrated the human resources and resolved the labor cost problem successfully At first, there was an immense difference in their strategies between two companies. Lenovo paid attention solely in the internal training among skilled and outstanding people while IBM’s training mechanism was far improved. Lenovo hires employees according to the degree of agreeing its corporate culture whereas IBM focuses on morality. The most practical issue seemed to be the cost of labour.
The total amount wages of IBM’s employees was much greater than Lenovo’s. IBM’s employees enjoyed wages about seven times more than Lenovo’s among the same level positions. Lenovo determined to stick to the wage level of the previous IBM’s executives within three years and also their IBM’s stock options exchange to Lenovo’s in the same amount. In three years, they gradually prepared to form an integrated payroll system. In which case, Lenovo retained the IBM previous technicians and the top executive group which are definitely crucial assets for Lenovo. 2.3 Resolved the difficulty of blending two brands
IBM’s brand value is fairly influential and stable, maintaining its name value at top three for 6 years (2001 to 2006) whilst Lenovo did not gain much global reputation before the merging. In order to keep the
competitiveness of IBM’s global PC business and settle the problems of blending two brands in a steady state, Lenovo and IBM got in terms that Lenovo would be able to use the trademark of IBM in five years, after five years, Lenovo can only us ThinkPad and ThinkCentre. Hence, the co-branding strategy for Lenovo to merge with IBM’s PC department was quite fruitful which did not hurt IBM’s reputation and during the buffer time, Lenovo are able to increase its popularity worldwide with the brand of IBM, after five years, Lenovo earned its own reputation. 2.4 Well-designed corporate management plan
Lenovo has made a pivotal management plan after M&A strived to unravel the financial difficulties.
STEP ONE: In order to stabilize overseas customers after the acquisition as well as to learn know-how from advanced International management team, Lenovo selected two foreign managers as CEO in roll, Stephen Ward(the senior manager of IBM) and Amelio (the ex-vice CEO of DELL). During this term, the primary task for the Chinese senior managers is to learn in despite of unpleasant situation. Stephen Ward stabilized the original employees of IBM and customers, which plays a central role in reducing the flow of employees and customers. Amelio constantly induced the efficiency management of DELL to Lenovo, cut uncalled for staff member, and streamlined the whole management structure.
During that period, Lenovo accomplished a high level of profit of more than 40 million dollars. Moreover, Chinese managers had acquired a bulk of experience in multicultural corporation management and stored a pool of the capable employees for future development.
STEP TWO: Restructured foreign CEOs that are near-sighted and lack in courage to enlarge business and reemployed the reliable and outgoing Chinese senior management crew after 4 years. This step established the desire of original employees of Lenovo and released the inner power of Lenovo storing for 4 years.
3. What should the company do next to improve its post-M&A initiatives 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 to its innovative corporate culture. Lenovo Group has established a R&D team which has three core research locations—China, The US and Japan. And the team is closely connected with the business department. Within Lenovo group, they called this enormous system, “Global innovation triangle”.
After 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, is designed by the senior director David and his American team, and it impossible under IBM’s rule. And this is a very good beginning. Even though Lenovo has a global marketing channel after the acquisition of IBM PC unit, it needs a more proactive marketing team.
The sales team of IBM just issued orders for Lenovo but never take active steps to find new customers. The acquisition of IBM PC leads to a loss of the customers such as the US government, so that the marketing team of Lenovo should improve its skills to find new customers. Lenovo should deepen its internationalization achievements. Since Lenovo’s success is attributed to its long-term target on emerging markets and successful overseas M&A, it should run a good business of the corporations it merged. Lenovo should shape itself for the global market.
Positioning is always the critical issue that the Chinese companies ignore, and it is the reason why Chinese company can hardly last longer than other in western countries. After the positioning, Lenovo should rationalize their pricing strategy. The value of the product is an important factor to concern; Lenovo can no longer make low-price strategy to survive in the global market. Lenovo should rather concern about the demand of their target customers, and make valuable and long-lasting product for them. Since China is concerning about the industrial upgrading, Lenovo should grasp this opportunity, and actively develop new smart phones, tablet PCs, smart TVs to promote the association to achieve the leap from PC to PC +.
In conclusion, the traditional era of homogeneous workforce has begun to change. With the quickly changing social structure and emergence of new technology, a heterogeneous workforce is currently essential to market’s needs. In the past few years, China has emerged as the most potential market with a huge population, rapidly growing domestic demand and low cost of production.
Many multinational companies have been trying to get a footing in China in order to obtain their competitive advantages. Consequently, that has posed serious challenges to the Chinese local producers in competing with these large giants. In order to survive and boost businesses growth, many business need to expand its market beyond the home base. There are many entry modes that may help firms business move into the international market. After the M&A has taken place, organization needs to pay extra attention on the strategy it chose to adopt to integrate the culture of the two companies to keep the smoothness of the organisation operation and performance.
From the case study of Lenovo and IBM, a number of important conclusions can be drawn. For a Chinese company like Lenovo, the main motives for its embarking on M&A with IBM PC-D were its need for international branding to gain access to international customers as well as its need to be equipped with technology. As mentioned previously, Chinese products have always been marketed at the lower end of the product line with low costs and poor quality. Acquiring a well-known international brand is considered to be the fastest route to changing these intolerable perceptions of the consumers towards Chinese products and booting up its product image.
Under this special circumstance, the need for branding is deemed the most important for a Chinese company to expand into international market. The case of Lenovo’s adopting a separate management mode to manage IBM PC department team was different from those described in the literature. The acquiring company is the very one that encourages the acquired team to preserve and maintain its own management system and procedure.
Among the reasons behind this move, the most curial factor affecting this decision is fixed length of time agreed by IBM to allow Lenovo to use the brand ThinkPad. With this fixed term of a five-year period posted to Lenovo has to make best effort to build up its own brand “Lenovo” within this period. Therefore, it is sensible for Lenovo to encourage IBM PC department to maintain its own system and focus on digging the target in time.
The use of culture integration committee in the case study of Lenovo has been very useful and helpful for members to understand and become more aware of the differences it may occur among them. The committee has set up several activities such as culture discovery newsletter and discussion forums to encourage communication between two teams. These arrangements have been well received by the employees with active participation and enthusiasm. Therefore, it is believed that this strategy may well be recommended for organisations to encourage communication between employees.
Courtney from Study Moose
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