China-based Lenovo and Japan's NEC Corporation have agreed to combine their personal computer (PC) businesses in Japan in a joint venture. At the outset, the Chinese company will have a 51% stake in the JV and NEC a 49% stake, but over time Lenovo is likely to take full control. NEC will be paid a maximum of $500 million for selling what is currently Japan’s largest PC business. The deal was announced in Tokyo last Thursday.
The JV will catapult Lenovo to the number one position in Japan's PC market from seventh at present. It will also allow both firms to grow their commercial and consumer PC businesses in Japan -- the third-largest PC market in the world -- through a stronger market position, enhanced product portfolios, and expanded distribution channels.
Lenovo will compensate NEC a maximum of $500 million for relinquishing control of its PC business, payable in stages over five years.
On signing, Lenovo will issue new shares to NEC with a value of $175 million. The shares represent 2.8% of Lenovo’s issued share capital. The number of shares to be issued was determined based on the volume-weighted average price of Lenovo's shares on the Hong Kong stock exchange for the 30 days ended January 26. The shares are subject to a lock-up for two years from the date of issue.
NEC will receive another $50 million from Lenovo if the JV achieves certain defined financial milestones for the five fiscal years between April 2011 and March 2016.
NEC has a put option to sell its remaining 49% to Lenovo, while Lenovo has a call option to buy the remaining 49%. Both the put and the call can be exercised after five years. The exercise price is also based on financial milestones, but is capped at $275 million.
The $500 million maximum consideration is equal to 0.19 times NEC's revenue for the past 12 months, sources said. On a present value basis, accounting for the fact that only $175 million is being paid upfront, the multiple drops to 0.16 times, they added.
The board of the JV will have five directors, of which Lenovo will nominate three and NEC two. Hideyo Takasu, who is currently president of NEC personal products, will become president and chief executive officer of the JV. Roderick Lappin, the president of Lenovo, Japan, will become executive chairman.
“Lenovo is the right partner at the right time for NEC, and we believe that we are creating a strategic relationship today that will benefit NEC and our customers for many years to come,” NEC president Nobuhiro Endo said in a written statement. “We believe this alliance will further reinforce and expand our PC business in Japan, upholding the NEC brand name and will continue to provide Japanese PC users with products supported by high quality and service.”
Media had been speculating about a deal between the two companies for a few days. However, neither the financial details nor the fact that NEC has agreed to a deal that has a clearly defined roadmap to an exit in five years were known. The two companies held a press conference in Tokyo on Thursday evening after the deal was announced and, despite the short notice, around 100 reporters were present, according to one source. Many questions were raised about what the deal will mean for NEC’s business and large customer base in Japan. Both companies stressed that for five years the deal is truly a partnership. To this end, the NEC product and corporate name will be maintained for five years.
In early 2009 NEC withdrew from its PC business in Europe after being unable to turn a profit. This left the Japanese firm, which once had aspirations to become a global PC player, with a PC business only in its home market. NEC had been evaluating a number of strategic options for its Japanese PC business, said a source, explaining how the JV with Lenovo came about. The firm did not run an auction for the business. Rather, it identified Lenovo as a partner that would satisfy a number of objectives. NEC was advised by Credit Suisse.
Lenovo, meanwhile, will become the number one player in a country that has a huge consumer electronics market. The JV will also add significantly to Lenovo’s current volumes and will provide access to technology.
The deal marks the first time a leading Chinese company has made an acquisition of a significant size in Japan. It comes only days after Japanese beverage major Kirin Holdings combined its non-alcoholic beverages business in Greater China with China Resources Enterprises (CRE). Like NEC, Kirin will be the minority partner in the JV with a 40% stake. CRE will own the balance 60%. However, a key difference is that CRE brings to the table an extensive distribution network and a strong presence in mainland China. Nomura advised Kirin on the deal.
Both deals also reflect the trend that Chinese and Japanese companies are increasingly looking at ways to work together for mutual benefit. The NEC deal will be watched closely in both countries as it could be a blueprint for future M&A activity by Chinese companies, said a source.
The Lenovo-NEC deal saw Goldman Sachs cement its relationship with Lenovo. Goldman had earlier worked with Lenovo on its $1.75 billion acquisition of International Business Machines' (IBM) PC division in 2004 -- at the time the largest overseas acquisition by a Chinese technology company. That deal had its fair share of sceptics, but Lenovo managed to return the business to a profit in 2005.
