Global Economics

IBM Sells Lenovo Shares at a Discount


The sale of $84 million worth of shares, at a 6% discount to the Apr. 21 closing price, cut Big Blue's stake in the Chinese PC maker to 6.2%

International Business Machines (IBM) last night sold HK$651.8 million ($84 million) worth of shares in Lenovo, reducing its stake in the Chinese PC maker for the fourth time in just over a year. The sale came on the back of a 17% gain in the past eight sessions, which pushed the share price above the level where IBM sold its previous batch of shares in late February.

The discount was twice as wide this time—6% versus 3% in February—and the deal was priced at the bottom of the range as opposed to the top, but the seller still achieved a higher price per share than eight weeks ago. According to a source, there was enough demand to fix the price above the low end of the range for a 5% discount, but the bookrunner was likely more comfortable to keep it low to ensure a wider distribution. Investors tend to put their orders in at the bottom of the indicated range quite routinely these days and most Hong Kong blocks over the past couple of weeks have price at the low end.

IBM sold 116.19 million shares at HK$5.61 apiece, trimming its stake in the Chinese PC maker to 6.2% from 7.5%. The shares were offered in a range between HK$5.61 and HK$5.76, which equalled a discount of 3.5% to 6% versus yesterday's closing price of HK$5.97.

The deal, which was open for just under three hours and represented about four days' worth of trading based on the volume over the past 15 sessions, was well covered by about 40 investors. The majority of the demand came from Asia, but there was also strong participation by European investors.

In addition to the past eight sessions of gains, Lenovo has been on an upward trend since mid-March when it—like many other companies—hit a low of HK$4.34. However, it is still down 32% from its November 2 high of HK$8.74, and while several analysts feel the share price may not repeat that again in the short term, a majority expect it to continue to gain from current levels. According to Bloomberg, 11 of 17 analysts have a "buy" recommendation on the stock, while four have a "hold". The average target price is HK$6.46

Citi, which has been the sole bookrunner on all four sell-downs by IBM, including this one, recently raised its target price to HK$7.50 from HK$7 based on assumptions of widening operating margins. The investment bank also added Lenovo to its China Tech Top Pick list and said the company's focus on emerging markets in China, India and Eastern Europe and its modest 20% exposure to the US will result in stable top-line growth.

The sale came on the back of data last week showing that Lenovo continues to gain market share. According to industry researcher IDC, Lenovo's 21% PC shipment growth in the first quarter boosted its market share to 6.9% from 6.6% in the previous quarter and confirmed its position as the fourth largest PC maker in the world after Hewlett-Packard, Dell and Acer.

IBM received a 15% stake in Lenovo as part payment when it sold its PC business to the Chinese company in April 2005 and has been converting part of that into cash over the past 14 months. The fact that the share price has come off substantially from its highs is unlikely to worry IBM as the current price is still well above the HK$2.675 at which it initially received the shares. In February last year it sold a 3.5% stake at HK$3.20 per share, in May it offloaded a 2.6% stake at HK$2.92 per share and on February 28 this year it sold a 1.3% stake at HK$5.41.

The lock-up following this transaction will last until June 30, leaving the US company free to sell the rest of its shares after that.

Citi has emerged as an aggressive player when it comes to placements, having been involved in four of the six block trades in Hong Kong-listed companies in the past week, of which three have been on a sole basis. Aside from Lenovo, it has also helped arranged sell-downs for existing shareholders in Cosco Pacific, Shenhua Energy and Sino-Ocean Land—the latter together with Morgan Stanley. As of last Friday the US investment bank was at the top of Dealogic's ECM league table for Asia ex-Japan, having arranged $3.1 billion worth of trades.


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