Why Lenovo bought Motorola and not HTC

The news of Lenovo, the world's largest maker of personal computers, acquiring Motorola from Google in a $2.9 billion deal, is still creating ripples. It is well known that Lenovo has been on the lookout for acquiring a mobility devices company for some time now as a part of its "PC-Plus" strategy, which had the Chinese hardware giant looking for a foothold in the bustling mobility market.

A few months back, there was a lot of speculation around the possible acquisition of the Taiwanese smartphone maker HTC by Lenovo. The deal was likely to be sealed around the same time as the Lenovo-Motorola deal. So why did Lenovo acquire Motorola and not HTC, when the latter clearly had more footprint to offer?

The primary reason for this, according to Vishal Tripathi, principal research analyst, Gartner, is that Lenovo needed to gain an entry into the US market where it doesn't have significant inroads in the smartphone arena. Motorola, which is still a known name in US and other key markets of Western Europe and Latin America, can help Lenovo in these geographies.

According to Canalys' figures, the combined market share for Google, Motorola and Lenovo in the smartphone segment stood at around 6% during the fourth quarter of 2013. Lenovo's strong presence in its home market of China, combined with the foothold that it will gain in the US is likely to make a big impact in 2014. The other reason why the Lenovo-HTC deal didn't materialise could be the higher market valuation of HTC. HTC was valued at $3.8 billion at the end of Q2, 2013, down from $37 billion at its peak, after its shares tumbled to an eight-year low on September 9, 2013.

The acquisition of HTC would have set Lenovo back by almost a billion dollars when compared to the super discounted price of $2.9 billion for which it acquired Motorola. However, it was definitely not the price tag of HTC alone that hindered the Chinese behemoth. That Lenovo is not exactly cash crunched is well illustrated by the fact that it wrapped up two deals totalling $5.2 billion within a week (it also acquired IBM's X86 server business).

Tripathi adds that the acquisition of HTC would have only given Lenovo an access to hardware and perhaps more exposure to the emerging markets. Instead, Lenovo decided to invest in a more strategic play in the Android pie. "With Motorola, Lenovo got access to patents as well as a strategic relationship with Google. Though HTC has more numbers and more presence to show, it was the Google factor that clinched the deal." According to Bloomberg data, HTC's share of the global smartphone market fell to 2.8% in the second quarter from 5.8% a year earlier.

The biggest benefit of Motorola for Lenovo is the footprint in the US market. Also, a strategic relationship with the owners of Android will give it more control on its mobility devices. It is a win-win situation for Google as well because it gets to keep the patents and also gets rid of the hardware business that was pulling it down. The progression of the Lenovo-Google relationship and how it will take on other smartphone rivals will be a thing to lookout for in 2014, says Tripathi.

However, we should not read too much from India perspective in the Lenovo-Motorola deal. Emerging markets like India are not likely to see any immediate impact of this acquisition. For instance, the launches of Moto G and Moto X remain unaffected. However, in the long run, Lenovo might be able to provide cheaper mobility devices and that could impact the Indian market. "Hardware bit will only impact emerging markets while the patents will play a key role in establishing Lenovo in the developed markets," says Tripathi.

The one clear causality in this deal is HTC, as a bulked up Lenovo will further pressurise the Taiwanese smartphone manufacturer, who many believe is heading the BlackBerry way.

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