The Buyouts Deals of the Year Awards are supposed to be won by deals in which financial sponsors take a controlling interest. It’s in the small print, right after the one about deals needing to close in calendar 2005. But like all good rules, this one was itching to be broken.
So, without further ado, the Emerging Markets Deal of the Year award goes to Texas Pacific Group and General Atlantic, for their non-control participation in Lenovo Group Ltd.’s acquisition of IBM’s personal computer business (ThinkPad). The deal not only morphed a regional also-ran business into the world’s third-largest PC maker, but also helped both TPG and General Atlantic further validate putting boots on the ground in China several years before the gold rush arrived.
“The real value creation of this deal is still ahead of us,” says Vince Feng, a Hong Kong-based managing director with General Atlantic. “We obviously hope to exit eventually, but we look at this as a long-term investment.”
Six Years in the Making
Lenovo did not consider buying IBM’s PC business until late 2004, but seeds of the future transaction were actually planted several years earlier.
Back in 2000, a group of General Atlantic investors met in China with Liu Chuanzhi, chairman of Hong Kong-listed tech conglomerate Legend Holdings. GA was mostly interested in learning more about early-stage investing in China, while Liu was looking for advice on the possibility of Legend spinning out its distribution and software assets (a.k.a. Digital China). Less than one year later, GA had invested in the Digital China spinout. Shortly after, Legend renamed its core PC business Lenovo.
Fast forward four years, and Lui had come to the realization that Lenovo was not long for the world if it didn’t expand beyond its Asia-Pacific base. Instead, it would have to acquire some assets outside of China. The most obvious-and ambitious-option was to strike a deal with IBM, whose CFO John Joyce had told Lenovo that the legendary ThinkPad division soon would be on the auction block.
Lui called General Atlantic, and asked for help determining if such an acquisition would make sense. If Lenovo were to bid and win, Lui told GA, the private equity firm would be welcomed in as an equity participant on the deal. GA agreed, conducted due diligence and told Lui that the acquisition would, indeed, make sense.
At around the same time, U.S.-based buyout shop Texas Pacific Group also was taking a good hard look at the ThinkPad division. The unit had over $10 billion in annual revenue, but also would require a major cultural and procedural transformation-similar to what Clayton Dubilier & Rice had successfully navigated when buying IBM’s printer business in 1991 (Lexmark).
“It was the kind of situation that appealed to us both intellectually and strategically,” explains James Coulter, a founding partner of TPG.
Several other parties also bid, but IBM only seriously considered Lenovo and TPG. Within IBM, two camps emerged. The first “strategic” group felt that Lenovo should win, thus helping IBM gain further insights and partners within the Chinese market. The second group preferred the classical buyout model in which the existing ThinkPad hierarchy would, most likely, remain in charge. Moreover, the second group wasn’t keen on the idea of negotiating with any Chinese entity, given regulatory and cultural differences.
IBM’s final decision came down to the wire, as it called victor Lenovo and loser TPG just 30 minutes apart. In the end, IBM believed that the possible synergies trumped home-field concerns. After all, it argued, it’s not like the company could simply shut its eyes and pretend China didn’t exist.
On the day that Lenovo and IBM made their joint announcement, TPG’s Coulter met in New York with Lenovo CEO William Amelio. The pair engaged in a frank discussion about opportunities and risks that each side had identified during due diligence. Soon after, Lenovo invited TPG and its Asian affiliate Newbridge Capital into the deal.
The final transaction was valued at $1.75 billion, including $500 million in assumed debt. As part of the deal, Lenovo also received a $350 million private equity commitment from TPG ($200 million), General Atlantic ($100 million) and Newbridge ($50 million). Approximately $150 million of the investment was used directly to support the ThinkPad acquisition, while the rest was earmarked for general corporate purposes.
IBM also maintained a 17% stake in the business, in order to better cement a working partnership with Lenovo.
“One of this deal’s main challenges is that you have all of these IBM umbilical cords going into the business, and those cords need to be severed,” says Bill Grabe, managing director of General Atlantic. “The trick is how you do that, so part of the transition plan was a very detailed approach about how to move away from the mothership.”
Part of that process, of course, is involving General Atlantic and TPG on much of the decision making. Coulter says that the firms are treated like partners instead of like minority investors, and that Lenovo understands the benefits of Western voices on its board while trying to penetrate U.S. consumer consciousness.
The two firms also helped Lenovo navigate U.S. political waters, which were roiled with the idea of identifiably American products like IBM PCs being owned by a Chinese entity.