NEW YORK/SAN FRANCISCO (Reuters) - Lenovo Group (0992.HK) said on Wednesday it agreed to buy Google Inc's (GOOG.O) Motorola handset division for $2.91 billion (1.75 billion pounds), in what is China's largest-ever tech deal as Lenovo buys its way into a heavily competitive U.S. handset market dominated by Apple Inc(AAPL.O).
It is Lenovo's second major deal on U.S. soil in a week as the Chinese electronics company angles to get a foothold in major global computing markets. Lenovo last week said it would buy IBM's low-end server business for $2.3 billion.
The deal ends Google's short-lived foray into making consumer mobile devices and marks a pullback from its largest-ever acquisition. Google paid $12.5 billion for Motorola in 2012. Under this deal the search giant will keep the majority of Motorola's mobile patents, considered its prize assets.
Shares in Google climbed 2.2 percent to about $1,131 in after-hours trading. Reuters reported the deal earlier on Wednesday, citing sources familiar with the deal.
The purchase will give Lenovo a beach-head to compete against Apple and Samsung Electronics (005930.KS) as well as increasingly aggressive Chinese smartphone makers in the highly lucrative U.S. arena.
In 2005, Lenovo muscled its way into what was then the world's largest PC market by buying IBM's (IBM.N) personal computer division. It has powered its way up the rankings of the global smartphone industry primarily through sales on its home turf but has considered a U.S. foray of late.
"Using Motorola, just as Lenovo used the IBM ThinkPad brand, to gain quick credibility and access to desirable markets and build critical mass makes a lot of sense," said Forrester Research analyst Frank Gillett.
"But Motorola has not been shooting the lights out with designs or sales volumes in smartphones. So the value is simply in brand recognition to achieve market recognition faster - and to expand the design and marketing team with talent experienced at U.S. and Western markets."
The deal is subject to approval by both U.S. and Chinese authorities.
Chinese companies faced the most scrutiny over their U.S. acquisitions in 2012, according to a report issued in December by the Committee on Foreign Investment in the United States. Analysts say political issues could cloud the deal, especially with Lenovo trying to seal the IBM deal at the same time.
In the deal for the Motorola handset business, Lenovo will pay $660 million in cash, $750 million in Lenovo ordinary shares, and another $1.5 billion in the form of a three-year promissory note, Lenovo and Google said in a joint statement.
In two years, China's three biggest handset makers - Huawei HWT.UL, ZTE Corp (000063.SZ) and Lenovo - have vaulted into the top ranks of global smartphone charts, helped in part by their huge domestic market and spurring talk of a new force in the smartphone wars.
Huawei declined to comment on the deal on Wednesday.
In the United States, the Chinese companies continue to grapple with low brand awareness, perceptions of inferior quality and even security concerns. In the third quarter of last year, ZTE and Huawei accounted for 5.7 percent and 3 percent of all phones sold in the United States, respectively, trailing Apple's 36.2 percent and Samsung's 32.5 percent, according to research house IDC.
Lenovo had negligible market share.
Globally, however, Lenovo ranked fifth in 2013 with a 4.5 percent market share, according to IDC. That's up from 3.3 percent in 2012 and virtually nil a couple years before that.
On the Google front, the Internet company has struggled to turn around loss-making Motorola. Now it's willing to step back from the hardware arena and throw its weight behind handset makers that propagate its Android software, Kantar analyst Carolina Milanesi said.
"It all points to Google thinking in the short run that they're better off betting on Samsung and keeping them close," Milanesi said. "And of course now they're enabling a second strong runner (Lenovo) in the Android ecosystem."
Analysts had seen Google's Motorola acquisition as primarily a way to secure the company's trove of patents amid the technology sector's increasing legal battles.
Many industry observers were surprised that Google did not immediately sell the hardware division after the deal closed, choosing instead to operate Motorola a separate company.
It did sell Motorola's cable television set-top box business to Arris Group Inc for $2.35 billion at the end of 2012.
Lenovo is being advised by Credit Suisse Group CSGN.VX while Lazard Ltd (LAZ.N) advised Google on the transaction, the people said.
Writing by Edwin Chan; Editing by Soyoung Kim, Chizu Nomiyama and Leslie Adler