Lenovo Group Ltd., the world's No. 3 maker of personal computers, wants to take over a mid-tier PC manufacturer valued at about $800 million to bolster a barely profitable European arm.
Its shares, which have seesawed since the firm released a strong set of quarterly earnings, stood 2 percent higher on Wednesday in a stronger market after the firm revealed it hoped to buy rival Packard Bell to strengthen its European operation.
If successful, the deal would allow the Chinese giant to quickly grab market share in a region where it is ranked sixth and barely profitable, while it continues to digest and revive a global PC business bought from IBM in 2005.
But it could expose the firm to an intense battle for consumers with the likes of Dell Inc., Hewlett Packard and aggressive Acer Inc.
It's like a cardiac stimulant. It will help Lenovo to guarantee growth, especially in Europe, said JP Morgan analyst Charles Guo. And it should help them maintain their global No. 3 PC vendor position.
Lenovo, just starting to turn around its U.S. operations, said on Tuesday it was in exclusive talks to buy PC maker Packard Bell BV -- which IDC estimates ranks ninth in global PC sales with 2 percent market share -- from owner John Hui.
One of a handful of Chinese companies trying to forge a global brand by investing abroad, it dropped to fourth globally in the first three months of 2007 but reclaimed the No. 3 spot from Acer a quarter later, riding an upswell of corporate demand.
To drive sales to consumers, the company now plans to launch a range of notebooks in January and desktops in March or April.
Most analysts would not be drawn so soon on Packard Bell's price tag or on the bottom-line impact if a deal goes through.
Based on an assumption that Packard Bell's topline is 1.5 billion euros ($2.06 billion), net margin is 2.5 percent and 15 times PE, the deal is estimated at $700 million to $800 million, said Cazenove's Zhao Xin.
But the price tag could change dramatically depending on its undisclosed bottom line.
Lenovo Chairman Yang Yuanqing -- nicknamed young marshal when he became the firm's second-in-command to founder Liu Chuanzhi -- has driven the PC maker's global ambitions since unveiling the IBM acquisition in 2005.
Barely two years later, Yang, now surrounded by ex-Dell executives including Chief Executive William Amelio, is essaying his second major overseas purchase.
Packard Bell was once a leading PC vendor in the United States but withdrew from the world's largest PC arena in 1999 to focus on Europe. Deutsche Bank estimates it chalked up between 1.5 billion and 2 billion euros of revenue in 2006 and analysts say it would be a good fit for Lenovo.
Lenovo has to move to improve its performance in the consumer market quickly, Guo said. This one is easy because Packard Bell is much smaller and its business in the mid-to-high end consumer PC market matches Lenovo perfectly.
Lenovo is now negotiating with Hui, known as Lap Shun Hui, the former owner of low-cost PC firm eMachines who runs offices in California and New York. He was unavailable for comment.
Hui masterminded the sale of eMachines to Gateway in 2004 for $266 million in cash and stock, then bought Packard Bell from NEC Corp. (6701.T: Quote, Profile, Research) in October 2006.
Analysts said a Packard Bell deal now could herald more acquisitions by Lenovo, as Hui holds 5 percent of Gateway.
John Hui sits on the board of Gateway. So this deal is beyond PB. It opens a window for the potential acquisition of Gateway, Guo said.
Lenovo shares soared 61 percent in the second quarter compared with the Hong Kong benchmark index's 10 percent rise. It now trades at 20 times estimated earnings, versus HP's 17, Acer's 12 and Dell's 21, according to Reuters data.
(Additional reporting by Rita Chang)