Security Concerns Over IBM Deal
U.S. regulators are raising national security concerns over IBM Corp.’s pending $1.25-billion sale of its personal computer business to China’s Lenovo Group, people familiar with the matter said.
Members of the Committee on Foreign Investment in the U.S., including representatives from the Justice Department and the Department of Homeland Security, worry that Chinese operatives might use an IBM facility in North Carolina to engage in industrial espionage, using stolen technologies for military purposes, the sources said.
IBM and Beijing-based Lenovo need the approval of the committee, which is chaired by the Treasury Department and includes 11 other federal agencies, to avoid a formal investigation and the need for clearance by President Bush. IBM and the government are negotiating the matter, which otherwise could scuttle the deal, the sources said.
“IBM has filed a required notice with the Committee on Foreign Investment,” said Edward Barbini, a spokesman for Armonk, N.Y.-based IBM. “IBM is fully cooperating with all government agencies in their review of this transaction.”
Lenovo spokeswoman Alice Li, in a statement to Bloomberg News, said: “Lenovo continues to fully cooperate with relevant authorities.” Chinese government officials had no immediate comment.
The Committee on Foreign Investment, which reviews takeovers of U.S. companies by international buyers, previously has blocked acquisitions by companies with links to China.
In 2003, Global Crossing Ltd. was forced to abandon a planned sale of its telecommunications network to Hutchison Whampoa Ltd., the Hong Kong-based conglomerate controlled by billionaire Li Ka-shing. The Defense Department and others on the committee refused to approve the transaction on national security grounds.
The Lenovo sale cleared a U.S. antitrust review this month. Lenovo and IBM formally filed a notice seeking CFIUS clearance Dec. 29, the sources said. Under U.S. law, if the committee hasn’t approved a foreign takeover in 30 days, it must open a formal investigation and ultimately deliver the results to the president for a decision.
“Because of national security concerns, we do not comment on matters that may be under review by the Committee on Foreign Investment,” said Treasury spokesman Tony Fratto.
The committee does not say publicly whether it’s studying a certain transaction, nor does it reveal any decision it makes.
Most transactions submitted to the CFIUS win swift approval, said James Bodner, who oversaw the Defense Department’s national security reviews when he was principal deputy undersecretary for policy under former Secretary William Cohen.
“An extremely low percentage of CFIUS cases have ever gone to the investigative phase, and of those, half were rejected or withdrawn,” said Bodner, now a senior vice president at Cohen Group, a Washington-based consulting firm.
In its negotiations with the committee, IBM has discussed implementing measures to address the security concerns over the facility, which is in Research Triangle Park in N.C., the people familiar with the matter said.
The U.S. recently sanctioned eight Chinese companies for exporting technology to Iran for use in a missile program, the New York Times reported Tuesday. The newspaper said it was “unclear” whether the technology was “dual-use.”
The concerns over the Lenovo deal underscore a broader debate over the U.S. government’s dealings with China. Though U.S. officials such as Treasury Secretary John W. Snow have called for closer ties between the two countries to foster trade, lawmakers such as Republican Sen. James Inhofe of Oklahoma have raised objections to embracing China for security reasons.
Lenovo is 57% controlled by Legend Group, which was established in 1984 by the Chinese Academy of Sciences, a government institution. Lenovo said in December that it had agreed to buy the IBM unit in a transaction that would create the world’s third-largest PC maker.
“This is a vanguard deal, the first major Chinese acquisition of a Fortune 100 company,” Bruce Rosenthal, a merger attorney at Nixon Peabody in New York, said at the time.
IBM’s PC division hasn’t made money in 3 1/2 years. It had a net loss of $139 million on sales of $5.22 billion in the six months ended June 30. IBM shares have fallen 3.9% since then, including a 62-cent decline to $92.38 on the New York Stock Exchange on Friday.
Also at stake in the deal are about $18 million in investment banking fees for Goldman Sachs Group Inc. and Merrill Lynch & Co., based on Bloomberg estimates. Merrill has advised IBM, and Goldman worked for Lenovo.
