By Charles King, Pund-IT® June 22, 2022
Strategic relationships are commonplace in the tech industry and typically enable the vendors involved to better serve shared customers and markets. But a few vendors, such as Lenovo are highly skillful at launching and evolving strategic relationships with farther reaching benefits and consequences. That is particularly true in the company’s enterprise-focused organizations, including the Infrastructure Solutions Group (ISG) and the Solutions and Services Group (SSG) that Lenovo launched a bit over a year ago.
The formation of PCCW Lenovo Technology Solutions (PLTS) that the company announced last week clearly demonstrates that Lenovo’s approach to M&A and strategic relationships is anything but “one size fits all.” Instead, it is exploring and will likely gain significant value from this investment which the company says it expects to be immediately margin accretive. Let’s consider that more closely.
Why acquire capabilities from PCCW?
So what exactly is PCCW and why will it make a valuable strategic ally for Lenovo? Headquartered in Hong Kong,
PCCW Solutions is a leading IT and business process outsourcing provider to customers in Hong Kong, mainland China and Southeast Asia, with deep expertise and proven solutions in the Telecom, Transportation, Public Sector, and Financial Services industry verticals. Its parent company PCCW is a global company with over 20,000 employees that owns a majority stake in Hong Kong’s #1 telecommunications service provider HKT Trust and HKT Limited, a leading operator of broadband, fixed-line, mobile communications and media entertainment services.
These last points are vital for understanding why Lenovo is acquiring PCCW Solutions capabilities to form PLTS. The two companies do a substantial amount of business in the Asia Pacific (AP) region (AP and China accounted for over 40 percent of Lenovo’s total revenues in its most recent earnings announcement). Plus, the partnership emphasizes Lenovo’s SSG business which grew 30 percent over the past fiscal year to $5.4B in revenues globally, and this deal could add ~50% to SSG’s AP revenues in the short term.
Lenovo + PCCW = PLTS
How exactly will the partnership be shaped? In part, by a controlling majority investment by Lenovo in a new company which will be called PCCW Lenovo Technology Solutions (PLTS). Lenovo will offer a consideration of $613.6 million, comprising $513.6 million in cash and US$100.0 million in Lenovo shares, by way of allotment and issue of 86,424,677 Lenovo shares to PCCW at completion. The shares will be issued at HK$9.025 per share, representing a premium of 19.2%, based on the close of trading as of 14 June 2022.
When the transaction is completed, Lenovo will become an effective 84% shareholder in PLTS via a direct 80% interest in PLTS and a 20% stake in PCCW Network Services, the holding company of PCCW’s remaining IT solutions obligations in Hong Kong. PLTS will focus on expanding its activities across the Asia Pacific region, which the Lenovo and PCCW believe represents over $300B in addressable IT Services market opportunity.
Final analysis
What are the key takeaways from this announcement and the new company?
First, the deal with PCCW involves a substantially larger investment than Lenovo has made in recent M&A history and other strategic partnerships. The companies stated that the share swap structure with PCCW reflects “the long-term commitment and confidence of both Parties in the strategic partnership.”
That seems entirely likely, but it is also worth noting that the deal is far more modest and contains considerably less risk than other enterprise vendors’ desperate attempts to kickstart their services businesses. The poster child for this kind of shortsighted practice was HP’s 2008 acquisition of EDS for $13.9B and the $8B write down it incurred four years later when it became obvious that the deal was a bust.
In comparison, the Lenovo/PCCW agreement seems almost restrained.
However, the partnership should also prosper, in part, by Lenovo’s plan to double its R&D investment and hire up to 12,000 R&D professionals globally by 2025. The company’s primary focus will be on developing new, innovative Intelligent Transformation solutions and services, centering on a “Client-Edge-Cloud-Network-Intelligence” architecture, with a three-track approach to focus on short-, medium- and long-term paybacks.
In other words, even as PLTS hits the ground running in Lenovo’s and PCCW’s focus markets, it will likely benefit from sustained, targeted strategic investments from its principal owner. Overall, Lenovo and PCCW’s strategic partnership and the resulting PLTS services organization should deliver substantial benefits and business opportunities to the companies and their respective customers and prospects.
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