Pros and Cons of the Acquisition Operation for Lenovo and IBM - Case Study Example

Pros and cons of the acquisition operation for both firms: Lenovo and IBM Introduction This essay refers to an acquisition deal in which Lenovo, a dominant Chinese company merged with IBM PC unit to as part of its entry into the international market, paying US $1.75 billion to acquire the world IT giant PC unit (Musil, 2004). Lenovo also acquired 10, 000 former IBM employees including the then CEO, Stephen Ward (Peng. 2008). On its part, IBM was awarded a 18.9% stake in the new company formed after the merger besides the US $ 1.75 billion (Keiser, 2007, pp. 23 – 34). Yet the merger also detailed that Lenovo would only use the IBM brand name for the ThinkPad products for the next 5 years; which will soon be ending. As such, Lenovo acquired a borrowed brand name and the infrastructure of IBM as its gain for the merger (Peng. 2008). The plan was evidently not just to use the brand name but to launch itself into the corporate market for PC’s using the reputed brand as a launching pad (Lenovo, 2008). This is understandable since despite being a Chinese giant, Lenovo was a non-entity in the world PC market. The US is the world leading PC market today and the gateway to most of the rest of the world (McGregor and Guerrera, 2004, pp. 63-79). That importance may not have passed the notice of Lenovo strategists. The essay seeks to discuss the gains that both IBM and Lenovo gained through the acquisition deal and thereafter, any delimiting consequences that may have accrued from the deal for both IBM and Lenovo. A close inspection of theories of merger and acquisition theories and the practice as detailed by relevant literature has been used to background the essays main points. Background Information On August 2004 and four for instance Yuanqing Yang, the current board chairman of the Chinese computer manufacturer Lenovo, announce that Lenovo would be paying a whooping US $ 1.75 billion to acquire IBM’s personal computing division (People Daily Online, 2005). The acquisition deal was settled on December 2004 and finalized in 2005(People Daily Online, 2005). At the end of the deal, a total of US $ 12.5 billion had been committed to the new company (Lenovo), US $ 6.5 billion in cash and US $ 6 billion in stock for the acquisition (Peng. 2008). This acquisition enabled the new Lenovo Company to graduate from the 9th world largest personal computer company to the 3rd largest in market share and capital size. It was landmark acquisition from the very word go and it has helped a largely unknown brand Lenovo, in the world market to leap into an amicable leading position in the global PC market. Since then, the company has returned approximate US $13 billion annual revenue, with most of their products targeting both enterprises and consumers around the world (Kotler and Pfoertsch, 2006, pp. 322 – 341). Notably, before the acquisition, Lenovo had been seeking entry to the international market for some years yet months after the acquisition, the Lenovo brand name had expanded operations and initiated its recognition as an international brand (Keiser, 2007, pp. 23 – 34). Experts judge that two advantages had helped make this possible, the esteemed brand name of the American IBM and the significant centers and other investments acquired and installed in the US immediately after the acquisition (Musil, 2004). The merger enabled the Lenovo branded products to be marketed outside China since then and for the very first time (Kotler and Pfoertsch, 2006, pp. 322 – 341). Recent market analysis indicates that Lenovo has currently gained a significant market share for both desktop and notebook corporate sales, most of which are manufactured and marketed by Lenovo (Kotler and Pfoertsch, 2006, pp. 322 – 341). By last year, half of Lenovo’s sales (including those bearing the IBM logo) were outside China although predominantly in Asia still (Kotler and Pfoertsch, 2006, pp. 322 – 341). Benefits Accruing from the Acquisition Benefits for Lenovo When a company saturates its original market niche and there is no more room for growth, the next phase of growth becomes seeking international presence (Child and Rodrigues, 2005, pp. 381-410). To do this, Lenovo had had no experience and no manpower structure to facilitate such a move. They thus sough to benefit from IBM’s international sales network. Indeed, they inherited IBM’s global market of 30,000-strong sales team and a global network of over 9,000 business partners. These outlets that had hitherto served IBM was immediately turned over into Lenovo PC’s outlets (Kotler and Pfoertsch, 2006, pp. 322 – 341). Secondly, Lenovo was greatly inexperienced in international business models. Chinese businesses, even the largest among them, have a weakness when it comes to commanding a global distribution(McEntire and Bentley, 1996, pp. 154-174). More than the infrastructure and the brand name, what Lenovo bought from IBM was the experience of a global market dominating brand. Wisely, they needed to ensure that IBM remained committed to foreseeing the Lenovo induction in world markets by chunking a 19% stake in the new Lenovo and awarding it to IBM so that there was a guarantee of common interests (Chen and Lu, 2008, pp. 12). Thirdly, it is important to note that Lenovo had the capital to fund an infrastructure of global distribution and marketing without the aid of IBM. They had a quality brand that had appeased 27% of the domestic. Yet having capital and strategic plans is not always what it takes to establish a global market presence. International business relies on capital as it does on product esteem and affection. In fact, most conglomerates succeed in the international from by simply exporting their reputation into new territories. Again, it is important to note that modern businesses rely much on strategic planning to sail through globalization phases. Strategic planning is what defines winners and losers in the international playground (Hill, 2003, pp. 147 – 181). Lenovo was evidently thinking about long-term interests that could accrue from the deal and not the temporal benefits of acquisition such as eliminating competition. With this in mind, the acquisition can then be judged as beneficial for Lenovo because it allowed the transfer of technology from the reigning IT solutions provider (IBM) to a nondescript Chinese company. Lenovo’s research and development received a hundred-fold boost that had taken millions of dollars to build and perfect. A good example of this technology transfer is in patents. Before the acquisition, Lenovo had only a single patent to their name (Chen, and Lu, 2008, pp. 12). The acquisition transferred over 1,000 IBM granted patents to Lenovo. That alone was a major investment into the future that had gone in favor of Lenovo. Innovative, highly trained and specialized IT personnel are hard to come by and it takes tons of money, time and effort to collect a winning team of engineers and think tanks/strategists. How good the personnel unit is defines how innovative and progressive the company is. It would have taken ages and a lot of money for Lenovo to harness adequate talent to compete with Dell, HP and Hewlett-Packard. However, by acquiring IBM’s 10, 000-strong work force, among them engineers and refined strategists, Lenovo had greatly regurgitated its market potential. It is no wonder then that they started by carrying over the former IBM CEO, Stephen Ward. Acquiring the staff and management of IBM infused a stronger manpower potential to the new company that had hitherto been governed by Chinese mode of business. These IBM staff members were not just transferred as new employees since they carried with them the reputation, connections and alliances that they had formed while at IBM (Buono, 1985, pp. 477-500). That diversity made Lenovo a formidable global force. A point to note here is that for Chinese businesses have had a very negative connotation and stigma in the international market for the last 20 years or so (Knowledge@wharton, 2005). Chinese manufacturers are reputed to sacrifice quality for low production cost and most Chinese products are thought of as cheap poor quality goods (Child and Rodrigues, 2005, pp. 381-410). By association with IBM, Lenovo gained a repute of superseding that adverse repute of Chinese manufacturers. This helped Lenovo to overcome the daunting challenge facing Chinese businesses in building credible international brands. Brand management requires that one build a brand with a particular market in mind (Hill, 2003, pp. 147 – 181). That market must not only be defined, but also simulated in needs and such that the products offered are targeted at those needs. This means that the brand is identified to be a solution for a particular need, the brand gaining repute in that niche. The only brand in the market that had epitomized quality in corporate solutions notebooks, the only one that was reputed enough to be called the IT solution leader in the globe was IBM. More importantly, IBM was an American brand, with loyalty and prestige in the US, the most important IT solution market today. Lenovo by its own could not have managed the feat of entering the American market and the global market as well on its own, at least not as fast and as cheaply. By acquiring IBM, Lenovo created a landmark success for brand management initiatives like none other witnessed in the 21st Century so far. Consequently, Lenovo’s market even with the pending loss of IBM branding is very promising, mostly because they only used the IBM branding in advertisements for the first year as a launching pad, and then abandoned it to focus on marketing their brand not as an IBM protégé, but one that is better than IBM. That mean that they are now ready to sail the market on their own and they are at an advantageous position already. This is important to note since it denotes genius in Lenovo’s brand management strategies (Chen, and Lu, 2008, pp. 12). Instead of branding their products as ‘ThinkPad’ (the IBM brand name), Lenovo used both the brand name ‘IdeaPad’ and ThinkPad’ alongside each other such that the two brand names gained equal exposure and reputation. This was strategic in that the moment Lenovo handed over and stopped using the IBM name; Lenovo will have launched their brand recognition for good. Lenovo might rank as third in global corporate sales after Dell and Hewlett-Packard, but the five years in which they have been operational indicates that they are threat to these two competitors, mainly because of a perceived superior reputation in product quality for high-end products as inherited from IBM. From whichever way the acquisition deal is analyzed, it is evident that Lenovo gained a historic brand image, a technological advancement, a solid customer base in the corporate market niche (Chen, and Lu, 2008, pp. 12). Today, Lenovo’s strengths lie in a new reputable brand image (One good enough to our IBM) and a dominant market share inherited from IBM (Chen, and Lu, 2008, pp. 12). Benefits for IBM While it may seem that all benefits of the acquisition deal have gone Lenovo’s way, IBM has also benefited from the acquisition to a great extent. To begin with, after five years of dormancy, IBM has a chance to rejuvenate their PC division. This is important because their market performance, innovativeness and brand growth had stagnated and even declined steadily over a period of time before the acquisition. Emerging from the acquisition, IBM now has a chance to start a new and build its brand to what it used to be. Again, the future of IBM may have benefited from association with Lenovo in that Lenovo is a company that inspires and encourages growth. Lenovo (also called legend in China) was a small investment founded in Beijing by 11 Chinese scientists sharing a vision to build an IT solutions company for the Chinese people. It started out with a seed capital of US $25,000 only, with a decimal, one-story premise. Over fifteen years, that small company transformed the Chinese landscape and ushered in a new era in China’s consumer PCs. The success story of Lenovo is inspiring and there must be something about their strategic planning, management and operations that is worth emulating now that they have moved from introducing PCs to Chinese households to establishing a global presence. IBM might by association, learn something from the merger. There has been a noted difference in the remuneration and salary systems between Lenovo and IBM, with Lenovo being the most favored by most job seekers according to research. Lenovo uses a lower rate of salary scale complimented by higher rates in bonus while IBM uses higher salary rates complimented by low bonus rates. The fact that Lenovo has a lower employee turnover than IBM, made IBM management to review their remuneration and salary policies in 2007, to feature something close to Lenovo’s (Keiser, 2007, pp. 23 – 34). Again, IBM benefited greatly from the acquisition in terms of capital generation. Us $ 1.75 billion was enough money to help IBM strategies and place itself in a market dominating move, especially now that they have their brand name back. The acquisition meant that they rent out (not sold) their brand name for a very handsome amount at a time that they had not been fairing well financially. This will be a boost to their research and development initiatives such that they will be better placed to create future innovations. Delimiting Consequences of the Acquisition Cons for Lenovo After the acquisition, Lenovo found itself managing two teams in a single organisation structure. Integrating the two teams for a five year deal would have been uneconomical and inefficient and so Lenovo opted for separate management mode where the IBM PC Division maintained its management procedures and system. The two teams were however encouraged to share initiatives and to communicate via a number of established departments. The problem with this is that the two teams had two different organisation cultures, different styles of doing things (Marks 1982, pp. 38-44). To solve the problem, Lenovo adopted accommodation strategies to fit into IBM’s way of doing things, ultimately resulting to increased workload for the Lenovo staff, work-life imbalance and work related stress (Cartwright and Cooper, 1993, pp. 57-70). Five years is very inadequate in building a brand that has to compete with the likes of Dell and Hewlett-Packard. That means the acquisition deal for only 5 years brand name use may have limited Lenovo’s ability to establish its brand in the US and globally. More so, Lenovo wanted to make its brand known independently before the lapse of five years. That means they only had a year or so to exploit the IBM name in building their own brand recognition (Keiser, 2007, pp. 23 – 34). Despite this limitation, IBM is expected to be back in the market soon now that the five year term has lapsed. This is likely to create a great competition for Lenovo. That is not all, the deal was made during the single greatest economic downturn since the Great Depression. The potential of the market reduced greatly across the world, and consumer purchases decline significantly in the 2007 – 2009 period. This meant that three of the five years of brand name acquisition were in a very dull economic climate that did not boost the exploits of Lenovo. The continued weakness of the general US economy, depreciation of the dollar and related economic stimuli has had a negative impact to the potential benefits of the acquisition deal (Zhang, 2006, pp. 32). While IBM had the most glamorous reputation in corporate PC global market, it is Dell that commands over 50% of this market. Acquiring repute is not equal to commanding the market since the returns are always in favor of the market dominant player. In essence, by outing IBM, Lenovo might actually have strengthened Dell and Hewlett-Packard by eliminating one of their most formidable competitor. As economic theorem and marketing practices demonstrate, eliminating a competitor does not always translate to improved market presence for the eliminator since other competitors are also in place to benefit (Borys and Jemison, 1989, pp. 234-249). Lenovo being the entrant might not be as advantageously placed as Dell or Hewlett-Packard in exploiting the space left by IBM. Cons for IBM The acquisition more or less drained IBM’s human resource since as part of the deal, Lenovo’s greatest move was in inheriting the highly trained, specialist, experienced and well organized IBM notebook executives (Fletcher, 2009). To start over again now will require great investment in acquiring new talent. All the market players considered, IBM’s ThinkPad brand name best epitomized quality, prestige and reliability in the corporate PC market. Selling out to Lenovo might have eaten into this reputation to the extent they cannot build again in future even after they get the brand name back. The five years of absence in the market also means that IBM lacks strategic growth and plans for the future at this time. By the time they catch up, the dynamic IT market may have changed completely and competition increased to extents they cannot keep up with (Galpin and Herdon, 1999, pp. 115 – 117). More importantly, it isn’t in the interest of IBM to be seen as an exclusive compatible of Lenovo, an image that most of the Lenovo products in the last five years have created by using both logos. IBM remains a market dominant force in manufacture of servers and these must be seen as independent products and not solely compatible Lenovo brands (Kanellos and Spooner, 2004). Conclusion From whoever angle the IBM-Lenovo acquisition is looked at, Lenovo seems to have had the best piece of the cake if not the largest (Keiser, 2007, pp. 23 – 34). This was rightly deserved given the amount of investment it put into the deal. Lenovo’s major benefit from the deal was building a global brand superior than a simple Chinese brand, reputed for poor quality and sub-standard manufacturing (Deng, 2006, pp. 71-81). Acquiring the IBM’s globally reputed brand, Lenovo boosted not just its product image, but it also gained access to international customers formerly served by IBM, gained manpower from the legendary IBM PC division, inherited great technological rights and advancements, an experienced highly resourceful human resource and gained a foothold in marketing infrastructure formerly under IBM’s disposal. In the transition, a non-name Chinese company became the third largest market payer in corporate PC supply (Knowledge@wharton, 2005). IBM also gained in terms of capital generation, culture integration and an opportunity to start a new after years of poor performance. Each of these firms also suffered some blows in the acquisition where IBM stands to compromise on its prestigious highly reputable brand name. IBM also lost its rich human resources base and market contacts. Lenovo seemed to have been undercut by the five year deal in that its ability to exploit the brand name was limited (Fletcher, 2009). This and a poor economic timing coupled by the potential competition from IBM after the five years are some of the problems presented by the acquisition. Nonetheless, this acquisition has been termed as the most successful acquisition of recent years, the most strategic for a Chinese company and one of the land mark deals of the 21st century (Chen, and Lu, 2008, pp. 12). References Borys, B and Jemison, D 1989, Hybrid Arrangements as Strategic Alliances: Theoretical Issues in Organizational Combinations, Academy of Management Review, Vol 14 (2), pp. 234-249. Buono, A et al., 1985, When cultures Collide: The Anatomy of a Merger. Human Relations, Vol 38 (16), pp. 477-500. Cartwright, S and Cooper, C 1993, The Role for Culture Compatibility in Successful Organizational Marriage, Academy of Management Executive, Vol 7 (11), pp. 57-70. Chen, G. and Lu, J 2008, Lenovo, Morgan Stanley Research, Morgan Stanley, New York, pp. 12. Child, C and Rodrigues, S 2005, The Internationalization of Chinese Firms: A Case for Theoretical Extension?, Management and Organization Review, Vol 1 (3), pp. 381-410. Deng, P 2006, Investing for strategic resources and its rationale: The case of outward FDI from Chinese companies, Business Horizons, Vol 50 (1), pp. 71-81. Fletcher, O 2009, "Lenovo restructures as emerging Market focus grows", MIS ASIA, The Home of enterprise IT in Asia, Retrieved on 17th April 2010, from Hill, C 2003, International Business, McGraw-Hill Inc, New York, pp. 147 - 181. Galpin, T and Herdon, M 1999, Complete Guide to Mergers and Acquisitions: Process Tools to Support M&A Integration at Every Level, Jossey-Bass, New York, pp. 115 - 117. Kanellos, M and Spooner, J 2004, IMB sells PC division to Lenovo, CNET News, Retrieved on 17th April 2010, from Keiser, G 2007, "Macs Take Reliability, Support Prize”. Computer World, Vol 9 (12) pp. 23 - 34. Knowledge@wharton ,2005, "The IBM/Lenovo Deal: Victory For China? Knowledge@wharton, Retrieved on 17th April 2010, from Kotler, P and Pfoertsch, W 2006, Brand Management, Springer, Heidelberg pp. 322 – 341. Lenovo, 2008, About us. Retrieved April 15, 2010, From Marks, M 1982, Merging Human Resources: A Review of Current Research, Merger and Acquisitions, Vol 2 (9), pp. 38-44. McEntire, M and Bentley, J 1996, When Rivals Become Partners: Acculturation in a Newly-merged Organization, International Journal of Organizational Analysis, Vol 4 (2), pp. 154-174. McGregor, R and Guerrera, F 2004, Chinese Companies Acquire a Taste for Western Targets, Financial Times, Vol 19 (20), pp. 63-79. Musil, S 2004, “IMB sells PC division to Lenovo”, CNET News, Retrieved on 17th April 2010, from Peng, S 2008, Achieving Successful Cross-Cultural and Management Integration: The Experience of Lenovo and IBM, Available online From < http://repositoryaut.lconz.ac.nz/bitstream/10292/486/4/PengS.pdf>. People Daily Online, 2005, "Lenovo, IBM acquisition deal completed", People Daily, Retrieved on 17th April 2010, from Porter, M 1985, Competitive Analysis, Free Press, New York, pp. 84. Yates, S 2006, State of the Corporate PC Market. Forrester, New York, pp. 15. Available online from Zhang, N 2006, A Long Long Way to Win-Win? IPR Issues in Technology Transfer from US to P.R. China, HKUST Business School, Hong Kong, pp. 32. Read More