JAIPURIA INSTITUTE OF MANAGEMENT, JAIPUR

POST GRADUATE DIPLOMA IN MANAGEMENT

THIRD TRIMESTER (Batch 2019-21)
END TERM-EXAMINATION

Course Name Advanced Corporate Finance Course Code FIN 404

Max. Time 3 Hrs Max. Marks 50

Instructions: Carefully go through the cases and answer all the questions that follow

 Step 1: Keep your laptop/desktop with internet connection ready.

 Step 2: Login to your personal Moodle account. Check your login into Moodle at least 30
minutes prior to starting (in case you face any difficulty, please contact Mr. Raj Singh
immediately on his mobile 9887283825)
 Step 3: Access and download the question paper of your course
 Step 4: Provide your answers in word document, although you are allowed to attach one
excel sheet along with Word Document in case of numerical solutions (Before submitting
the word document kindly ensure that you have entered page numbers in the word
document.) Also the word attachment along with the Excel attachment (in case of
numerical) should be named as Roll Number_Name.
 Step 5: Upload your completed answer sheet, in word document along with excel sheet (in
case of numerical), as attachments.

Case: Lenovo`s Acquisition of IBM`s PC Division

Lenovo began in Beijing in 1984 as the “New Technology Development Center,” a start-up
of the Chinese Academy of Sciences. The practice of government organizations arranging
commercial businesses was quite common at the time and was called “guoyou minying,”
meaning “state-owned, people-managed.” The Academy hoped it would be a source of
income to make up for government budgeting shortfalls.
In 1988, the start-up company expanded its operations into Hong Kong and adopted the
name “Legend Computer Group Co.” Over the next decade, Legend adapted to a role
distributing American- and Japanese-made computers and learning trade strategies by
partnering with companies such as Intel and HP. Eventually, the company introduced its
own self-branded PC, which, with the help of favorable market conditions and
government benevolence, began to dominate the Chinese PC market. However, the
company sought global expansion. The company name was changed to “Lenovo” since
“Legend” was a name already claimed on the international market. In 2004, Lenovo seized
the opportunity when IBM announced that it wants to sell off its PC division and only
focus on the enterprise business. This was a critical expansionary step allowing Lenovo to
eventually obtain the largest share of the international PC market.
As one global business director at Lenovo reported, “We believed that through this
acquisition, Lenovo can reach the designated position at one step…and we can benefit
from this acquisition in three areas: global market, valuable brand and advanced
technology.” However, the acquisition came with risks. Lenovo, a much smaller company,

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had only a fourth of the capital that IBM had at the time and the popularity of the Lenovo
brand was limited to China.
Beyond the logistical challenges, the business anticipated difficult culture clashes. As one
Chinese consultant stated, “The cultural challenges are going to be big. […] Lenovo hasn’t
had a particularly successful track record of partnerships with foreign companies.”
Culture clashes indeed proved difficult to manage as the two companies combined
operations. However, with time and effort, Lenovo was able to achieve cultural synergy
and is regarded today as an integration success story.
This analysis follows the M&A Synergies Framework, developed from careful research of
cross-border M&A cases and existing social psychology theories. The framework, as
utilized in this application capacity, outlines important considerations when approaching
cross-border mergers and acquisitions, especially between U.S. and Chinese counterparts.
This analysis addresses communication, behavior, management, environment, and
accounting and finance in the context of the Lenovo-IBM integration and provides
insights that can apply to future similar transactions.

Q1(a). As a manager of IBM, discuss the advantages of carving out the PC division? Also
analyze the alternatives available for carrying out this corporate restructuring process.
Q1(b). Discuss Lenovo`s motivations for acquiring IBM`s PC Division while throwing
light on the type of acquisition.
Q1(c). Discuss and examine the new risks Lenovo is going to face while running the newly
acquired international PC business from IBM. (8+8+7) Marks

Q.2 The Chicago Motor Company is proposing to replace its old DC motor-making
machinery with more modern equipment. The new equipment costs $9 million (the
existing equipment has zero salvage value). The attraction of the new machinery is that it
is expected to cut manufacturing costs of DC motors from their current level of $8 a motor
to $4. However, as the following table shows, there is some uncertainty both about future
sales and about the performance of the new machinery:

Pessimistic Expected Optimistic

Sales, millions of .4 .5 .8
motors
Manufacturing cost 7 4 3
with new machinery,
dollar per motor
Economic life of new 6 10 15
machinery, years

Conduct a sensitivity analysis of the replacement decision, assuming a discount rate of

12%. Chicago Motors do not pay any taxes.
Use the following table for summarizing your responses in terms of equivalent annual
cost savings (Millions) for different situations.

  Equivalent Annual Cost Savings (Millions)

  Pessimistic Expected Optimistic
Sales      
Manufacturing Cost    
Economic Life      

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Note: Examinee to submit the MS Excel sheets clearly showing all the relevant
calculations.
(3 x 9 = 27) Marks

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