Lenovo’s IBM Deal Has Sparked National Security Concerns

Pentagon

Before Lenovo can acquire an old server unit from International Business Machines Corp. (NYSE:IBM), the company must first prove to the U.S. government that the business won’t be used to tap into U.S. government secrets and infrastructure, Bloomberg reports.

Many U.S. government agencies, including the Pentagon and the FBI, buy their servers from IBM, along with some of the country’s largest telecommunications companies, according to sources who spoke with Bloomberg said Friday. Verizon Wireless, AT&T, and Sprint are among national telecom companies that buy IBM servers.

As a result, an interagency group called the Committee on Foreign Investment in the U.S., which is in charge of investigating the potential national security risks involved in foreign acquisitions of domestic companies, will be placing Lenovo under very close scrutiny in the coming weeks.

The investigation doesn’t come as much of a surprise to those familiar with the industry; reports issued in January by Bloomberg and The Wall Street Journal predicted that Lenovo’s then-recent acquisition would spark a government investigation. Lenovo is also hoping to acquire Motorola, another purchase that is likely to require scrutiny.

“It’s kind of a perfect storm of issues,” said Anne Salladin, a former Treasury Deparment official who worked for CFIUS. “Any foreign acquirer with this kind of asset purchase is very likely to be something that CFIUS would want to take a look at.” The CFIUS investigations can take as many as seventy-five days to complete, Bloomberg said.

Chinese acquisitions of U.S. companies have risen in recent years, sparking quite a bit of tension in Washington, and Chinese investors are the most scrutinized buyers of American companies, ahead of the U.K. CFIUS reportedly examined more than double the number of transactions by Chinese investors in 2012 than it did the year previous, according to Bloomberg.

As for what’s involved in the investigation? “The government is going to take a look at the degree of penetration of the servers, where they are, how old they are, what the reach-back capability might be,” said Mario Mancuso, an attorney based in Washington, D.C. “Could they use these servers as a means of insertion into U.S. government networks and data systems?”

“Anything now with China gets attention,” added James Lewis, who is a senior fellow at the Center 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.”

Lenovo, a Beijing-based company, is cooperating with the CFIUS investigation and has even agreed to pay a fee that’s more than double the standard size if it were to fail to acquire the IBM server unit. The fee, should the acquisition fall through, is more than $200 million, according to sources who spoke with Bloomberg.

According to Deirdre Murphy Ramsay, an IBM spokeswoman, both companies are prepared for a “comprehensive review,” and are “confident of a positive outcome.” Stephen Paul Mahinka, a lawyer at Morgan, Lewis & Bockius added, “This isn’t just some Chinese company you’ve never heard of. There are ways you can protect U.S. interests while at the same time not preventing the acquisition.”

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