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journal of negotiation
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

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