Sustaining Lenovo’s Momentum

As Lenovo Pursues Its Relentless Quest for Growth, Which Company Should It Acquire Next?

Lenovo appears to be on the acquisition trail, buying Motorola from Google and IBM’s x86 server business in quick succession.

While it would be interesting to look at IBM’s reasons for selling its low-end server business, it’s more important to examine Lenovo’s ambitious expansion and think about the possible next steps. Unlike IBM, which is moving away from very mature hardware segments, Lenovo has pursued a moderately aggressive acquisition strategy over the past 10 years. It’s filled gaps in its portfolio through acquisitions, and when no companies were available or willing to be bought, it hasn’t hesitated to set up joint ventures.

In terms of products, this means Lenovo controls all the devices it believes users rely on. This applies in the consumer market, with tablets, smartphones and TVs, and in the business market, with laptops, servers as well as a tentative cloud service.

In the first three quarters of 2013, Lenovo generated $26.4 billion of sales, a year-on-year increase of 18%. In the third quarter, revenue was $9.4 billion. In comparison, HP generated $29.1 of revenue in the quarter ending 31 October 2013.

Furthermore, there are some gems in HP’s portfolio: margins in the software business are around 22 percent, and those in printers about 16 percent. In HP’s fiscal 4Q13, its printer business alone accounted for revenue equal to two-thirds of Lenovo’s entire quarterly revenue and more than five times Lenovo’s profit.

Imaging — that is, printing, copying, scanning, document management and control — is clearly important.

There’s no doubt that Lenovo has a clear strategy for growth in computing, digital convergence and media content in the home. There may be opportunities in the business segment that are too good to be ignored. Businesses face several questions when addressing challenges in mobility, security, cost reduction and optimisation of business processes: Where does data reside? Who has access to it? How is it monitored and controlled? How is the value of the data being extracted and used? How is the accuracy of the data checked? Does this data lead to intelligent and actionable information that helps support the business and its sales?

Businesses are still in a hybrid paper/digital world and need help to ensure that the most effective and cost-efficient IT solutions and processes are deployed. They need help managing their processes, printing costs, fleet deployment and usage, extracting the value out of documents and ensuring that only authorised personnel can access specific pieces of information. HP has an obvious advantage over Lenovo in this area.

Should Lenovo turn its attention to the imaging market, how could it go about filling this gap?

There’s an established player in the imaging market with a comprehensive and competitive portfolio of technologies; it has direct and indirect routes to market; it has a set of hardware, software and services skills; it’s quite successful at marketing them; and, like some of the other operations that Lenovo has acquired, it has an IBM heritage.

It’s Lexmark.

Lexmark is actively investing in services through rapid acquisitions of software companies. It’s bought 10 companies in four years. A combination of Lenovo and Lexmark could become a formidable player in the TV, PC, tablet, smartphone, server, document, services and solutions markets, competing against Japanese and US companies in North America and Europe from a position of strength in China.

The array of products, intellectual property, skills and expertise offered by the combined companies would be a worrying prospect for competitors.