journal of negotiation

Topics: Lenovo, Balance sheet, Corporate finance Pages: 6 (438 words) Published: August 18, 2014

Lenovo Capital Structure Change
Terms of acquisition:
IBM’s x86 server business acquisition
The purchase price is approximately US$2.3 billion;
Including US$2,07billion paid in cash and the balance of US$182million in Lenovo ordinary shares. Motorola Mobility Acquisition
The purchase price is approximately US$2.91 billion;
Including US$1.41 billion paid at close, comprised of US$660 million in cash and US$750 million in Lenovo ordinary shares and the remaining US$1.5 billon paid in the form of a three-year promissory note. Expected Revenue Gains:

Lenovo group chairman and CEO Yang Yuanqing expected that, through the acquisition of IBM x86, the company would increase revenue of US$5 billion a year1. Lenovo Group Ltd. (992) plans to make the Motorola Mobility profitable within four to six quarters without eliminating jobs, CEO Yang Yuanqing said2. Hypothesis:

a) The risk of IBM x86 acquisition is equivalent to the overall Lenovo corporate level, therefore we use the average rate of earnings per cost and the revenue per cost of Lenovo from annual reports 2012-2014, to estimate the perpetuity earning of the acquisition.

2012
2013
2014
X86 Acquisition
Revenue
29,574,438
33,873,401
38,707,129
5,000,000
Earnings
475,416
631,592
817,470
93,066
Earnings/Revenue
0.016075
0.018646
0.021119
0.018613

0.018613

Data Source: Lenovo annual reports (Unit: US$,000)

b) Consider Motorola’s loss and acquisition’s financial and operational synergy benefits, we assume Motorola Mobility brings US$ 0.5 billion loss in 2015 and positive US$ 0.5 billion perpetuity cash flows to Lenovo from 2016 onward. Motorola Mobility

2015
2016
2017
Onward
Earnings
(Unit: US$,000)
(500,000)
500,000
500,000
500,000
Data Source: Lenovo annual reports (Unit: US$,000)

c) The tax rate is 35%, and the debt rate of return is 30%.

d) Both acquisitions are completed on the beginning of 2015 and cash flows in in the end of year.

Capital Changes

Indicator
Lenovo (March 31, 2014)
IBM x86
Motorola
Lenovo Post - Acquisition
Cash
3,858,144

(2,070,000)
(660,000)
1,128,144

Lenovo Stocks Issuing
11,400,000
182,000
750,000
-
Non-current Liabilities*
1,870,051
0
1,500,000
3,370,051
Market Capitalization
11,400,000
0
-
13,380,000
12,332,000
NPV
-
(1,840,386)
(618.044)

Total Assets
18,357,093
-
-
15,898,663

Before Acquisition
R (Equity) = 0.0002 + 0.743 * 0.35214 = 0.2608
WACC = = 0.2357

After Acquisition
R (Equity) = 0.0002 + 0.745 * 0.3521 = 0.2608

WACC = = 0. 2261
NPV (x86) = -2,070,000 – 182,000 + = - 1,840,386
NPV (Motorola) = - 618,044 =

Data Source: Lenovo annual reports (Unit: US$,000)

Lenovo’s capital changes reflect on the financial indicators, as below.

Indicator
March 31, 2014
Post - Acquisition
Change Percentage
Shareholder Value
Market Capitalization

11,400,000

13,380,000

17.368%
Return on Assets
(2015 year end)
0.0259

0.0259
0
P/E
13.95
18.53
+ 4.58
Financial Leverage
Non-Current Liabilities Ratio

0.1019

0.2120

+ 0.1101
Non-current Liabilities -to-Equity Ratio
0.6183
1.1142
+ 0.4959
Liquidity
Cash Ratio

0.2866

0.08380

(0.2028)
Net Working Capital

(61,744)
(2,791,744)
(2,730,000)
Data Source: Lenovo annual reports (Unit: US$,000)

As data above reveals that the sources of financing on Lenovo’s acquisitions consist of internal cash, stock issuing and company debt issuing. In post- acquisition, Lenovo’s capital structure is significant long-term debt increase (Non-Current Liabilities -to-Equity Ratio from 0.6183 to 1.1142), and roughly two thirds of cash outflows, which leaves Lenovo in a dangerous position of liquidity shortage and an advantage situation of avoiding financial slacks.
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