HCL Infosystems Ltd’s shares rose 21.3% on Tuesday after the Financial Chronicle newspaper reported that Lenovo Group Ltd is in talks to acquire the company. In response to a stock exchange query, the company said that it is unaware of any such development about its promoter intending to sell its stake. Even though this clarification came during market hours, the stock continued to rally.

The HCL Info stock has been going through a rough phase, hitting a record low of 36 on Monday after the company reported weak results for the June quarter late last week. In this backdrop, Lenovo’s likely bid has resurrected the hopes of its investors.

The company’s computer systems and related businesses have been performing particularly poorly. The latest figures from Gartner show it has been losing share in the personal computer market. Its market share fell from 6.6% in the year-ago June quarter to 5.6% last quarter. Besides, the company had made large upfront investments in its systems integration business, but business hasn’t expanded as expected.

What can Lenovo possibly gain by buying HCL Info? While it already has a much higher market share of 16.6%, it can consolidate its position in the Indian market and benefit from HCL Info’s manufacturing/assembly units. Interestingly, three of HCL Info’s four manufacturing units are located in close proximity to Lenovo’s existing manufacturing unit in Puducherry, increasing the prospects of synergies. Additionally, it can gain from HCL Info’s wide distribution and after-sales network.

Ahmed Raza Khan/Mint

Strangely enough, HCL Info’s large phone distribution business may also work to Lenovo’s advantage. The above-cited analyst said Lenovo is now the No. 2 maker of smartphones in China. Lenovo’s smartphones are in the mid-to-low price segment and can be targeted at Indian consumers, he added.

In sum, there seems to be more than one reason for Lenovo’s reported interest in HCL Info. Of course, there is no guarantee a deal will fructify. In the past, Lenovo has walked out of a deal in Brazil because of high valuations. At current levels, HCL Info’s valuations can be categorized at anything but high—its market capitalization is only slightly greater than the cash and cash equivalents on its books worth 700 crore. So investors can expect a premium if Lenovo actually bids.

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