Lenovo spending spree will have short-term downside

China’s Lenovo Group Ltd said third-quarter profit jumped nearly a third, beating estimates, as the world’s biggest maker of personal computers hoisted sales of smartphones in its drive to diversify out of the shrinking PC market.

Lenovo on Thursday reported net income rose 29 percent to $265.3 million for the October-December quarter. That was before it agreed to spend $5.2 billion on smartphone and servers businesses in two acquisitions in January, a spree that Chief Executive Officer Yang Yuanqing warned will weigh on his company’s finances in the near term.

Both the businesses Lenovo bought currently lose money. “In the short term (the deals) will have a negative impact on performance,” Yang said in a telephone interview after the earnings were announced. Lenovo later specified it will likely take three to five quarters to turn around the Motorola phone business it bought from Google Inc for $2.9 billion.

Lenovo has been aggressively pushing into smartphones and servers to offset the global decline in the desktop PC business as consumers switch to mobile devices. As well as the Motorola deal, it agreed to buy IBM Corp’s low-end server unit for $2.3 billion.

The net profit for October-December was well above the $204.9 million Lenovo posted a year earlier, as well as a $247.2 million consensus forecast on Thomson Reuters Starmine SmartEstimate.

Analysts see tougher times ahead, saying it may take the company at least a year to turn around its acquisitions. Heavyweights like Samsung Electronics Co and Apple Inc, dominant in global smartphones, will also provide stiff competition as Lenovo seeks to build up that business.

“I’m expecting a slowdown in the underlying, organic business,” said Jean-Louis Lafayeedney, a Hong Kong-based technology analyst at JI Asia, an affiliate of Societe Generale. “It will be at least a year before Lenovo can turn around growth,” the analyst said, speaking before the October-December earnings were announced.

The speed and scale of the buying spree – worth nearly half of Lenovo’s market value and partly paid for by issuing new shares – has spooked some investors. The company’s shares have dropped 6.04 percent since the start of the year, compared with the Hong Kong index’s loss of 4.65 percent.

In early trading on Thursday, the stock was down 1.27 percent, while the index was off 0.51 percent.

More on Lenovo

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Lenovo spending spree will have short-term downside