Lenovo's IBM deal under US scrutiny

While the firms are confident of approval, Lenovo may have to agree to restrictions

PUBLISHED : Saturday, 05 April, 2014, 1:07am
UPDATED : Saturday, 05 April, 2014, 1:07am

Lenovo Group must convince United States government officials that buying a server unit from International Business Machines Corp will not give China back-door access to US secrets and infrastructure.

The wrinkle is that the Pentagon, the FBI and the nation's biggest telecommunications companies buy the IBM servers, according to people familiar with the matter.

Use of the servers by the government, telephone networks and other potentially sensitive customers will spark close scrutiny from the interagency group known as the Committee on Foreign Investment in the US, which investigates national-security risks of foreign acquisitions of domestic companies.

"It's kind of the perfect storm of issues," said Anne Salladin, a former Department of the Treasury Department official who is now at Stroock & Stroock & Lavan in Washington. "Any foreign acquirer with this kind of asset purchase is very likely to be something that CFIUS would want to take a look at."

Beijing-based Lenovo, which announced the US$2.3 billion IBM purchase on January 23, has formally sought approval for the deal from CFIUS, according to a person with knowledge of the matter. Acquisitions of US businesses by Chinese buyers are rising, increasing tension in Washington over Chinese access to US technology.

Lenovo, which bought IBM's personal computer business in 2005, has been briefing officials on the deal, pointing out that it will not have access to the servers because IBM will continue maintenance on the equipment, according to a person familiar with the matter. That agreement lasts for five years and could be extended, said the person.

The service agreement may help ease the security review by CFIUS, which examined more than double the number of transactions by Chinese investors in 2012 than it did the previous year, making them the most scrutinised foreign buyers of American assets ahead of Britain.

IBM spokeswoman Deirdre Murphy Ramsey said the firm is prepared for a "comprehensive review" by CFIUS and is "confident of a positive outcome".

"Anything now with China gets attention," said James Lewis, a senior fellow at the Centre for Strategic and International Studies. "But Lenovo, because it's not a state-owned enterprise and because they've done deals successfully in the past, they're really well placed to get through."

While the companies say they expect to win clearance from CFIUS, Lenovo will probably have to agree to restrictions on the business, according to lawyers who advise firms on deals that require US security review.