Lenovo Agrees to $350 Mln U.S. Private Equity Deal
Thu Mar 31, 2005
By Eric Auchard and Sophie Taylor
SAN FRANCISCO/HONG KONG (Reuters) - Three U.S. private equity firms are investing $350 million in Lenovo Group Ltd. (0992.HK: Quote, Profile, Research) for a 12.4 percent stake, helping China's top computer maker pay for its $1.25 billion acquisition of IBM's (IBM.N: Quote, Profile, Research) personal computer business.
Shares in Lenovo rose nearly 6 percent in Hong Kong on Thursday after the investment, reported last week, was confirmed on Wednesday in San Francisco.
The stock trades near the level it did before the IBM deal in December, because investors had been wary of Lenovo's ability to integrate a loss-making PC business that is three times its size.
Under the terms of the deal, Texas Pacific Group (TPG) will invest $200 million, General Atlantic LLC (GA) will put up $100 million and Newbridge Capital LLC will invest $50 million in Lenovo, according to TPG partner Justin Chang. Lenovo plans to issue new shares in the deal.
"This will strengthen investor confidence in the Lenovo-IBM deal," said Marvin Lo, an analyst at BNP Paribas Peregrine in Hong Kong. "At the beginning everybody seemed quite worried, but this will help create a re-rating story."
The investment involves Texas Pacific, a final bidder for IBM's PC business that lost out to Lenovo, along with General Atlantic, which has served as a global strategy advisor to Lenovo management for the past five years, the partners said.
Of the proceeds, Lenovo will use about $150 million to help pay for the IBM deal and the rest for general working capital.
"The Lenovo-IBM combination creates the No. 1 market share player in Asia-Pacific and China, which are the fastest growing PC markets in the world," TPG's Chang said in an interview.
Newbridge is an affiliate of Texas Pacific and Blum Capital Partners. The private equity investors had sought to announce their investment in tandem with the IBM-Lenovo deal but were delayed, General Atlantic managing director Vince Feng said.
General Atlantic advised Lenovo on its global expansion strategy, venture investing and disposal of computer services business. Starting in early 2004, GA helped Lenovo approach IBM management about a potential merger, Feng said.
In December, Lenovo agreed to buy IBM's ThinkPad notebook and desktop divisions for $1.25 billion, outbidding Fort Worth and San Francisco-based TPG, which spent eight months pursuing a possible deal for the IBM division. IBM will receive $800 million cash and $450 million in Lenovo shares, Lenovo said. "This agreement represents a strong vote of confidence in Lenovo's prospects going forward as a global information technology leader," Yuanqing Yang, president and chief executive of Lenovo, said in a statement.
The $350 million investment would give the three private equity partners as much as a 12.4 percent stake in the combined Lenovo-IBM business and three of the 12 board seats, if warrants received in the deal are fully converted, Chang said.
IBM will hold preferred shares that convert into a 13.4 percent stake after Lenovo closes its deal to buy its PC business.
IBM originally agreed to receive an 18.9 percent stake in Lenovo, before the dilution from the private equity investment. Chang said International Business Machines Corp. will be the second-largest shareholder behind Hong Kong's Lenovo Holdings, the Beijing-based Lenovo Group's controlling shareholder.
Lenovo Group and IBM said in separate statements that their merger was on track. Lenovo said the plans to issue additional preferred shares and warrants to the private equity group would require Lenovo shareholder approval.
"This announcement doesn't affect the close strategic relationship," IBM Personal Systems Division spokeswoman Carol Makovich said of previously disclosed IBM and Lenovo plans.
Feng, who is based in Hong Kong, said the appeal of the Lenovo-IBM deal for General Atlantic was how it brings together two companies with little or no competitive overlap yet strong potential to cut overall purchasing costs.
In particular, he pointed to the potential cost savings from combining Lenovo, a company with $3 billion in revenue, and the IBM PC business, with $9 billion in revenue, simply through joint purchasing of components for their PC products.
Lenovo largely sells desktop PCs in the Chinese market, with consumers and government customers their main targets. IBM focuses largely on business customers in China, and globally. More business comes from ThinkPad notebooks than desktop PCs.
"On all three counts (geography, product type, customer focus) there is very little overlap between Lenovo and IBM," Feng said.
(Additional reporting by Dane Hamilton in New York and Doug Young and Tony Munroe in Hong Kong)
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