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IBM Said to Offer Concessions in Lenovo Deal

IBM is reportedly offering some serious concessions to convince U.S. regulators that selling its PC division to the Chinese won't compromise national security.

According to the terms of the proposed $1.25 billion deal, IBM becomes a reseller for Lenovo's desktop and laptop PCs clients. But Lenovo would gain access to IBM's contracts, including its vendor status with the U.S. General Services Administration for government computers, according to reports from Bloomberg News and the International Herald Tribune.

The condition has members of the Department of Homeland Security and the Justice Department concerned that Chinese spies potentially working undercover at IBM's U.S. manufacturing plants would use their knowledge for China's military gain, sources talking to Bloomberg said.

Because of that, Lenovo may be barred access to IBM's U.S. government contracts and also may have to restrict employee access to some of IBM's sensitive research facilities in Research Triangle Park, North Carolina, the reports said

The reports also suggested a three-hour meeting on Wednesday with the Committee on Foreign Investment in the United States (CFIUS) rendered no decision. A spokesman for the U.S Treasury Department-chaired CFIUS declined to comment to internetnews.com about any investigation by the 11-member committee. IBM was not immediately available for comment but has said that it is "following all the normal and routine procedures in the review."

IBM is taking the review very seriously as is indicated by its hiring of Brent Scowcroft, the former national-security adviser to former Presidents George Bush and Gerald Ford. Scowcroft is one of several consultants helping IBM gain approval from CFIUS, Bloomberg said in its report.

CFIUS' review determines whether a particular acquisition by a foreign country has national security issues. The deadline was extended 45-days after three Republican congressmen sent a letter to Treasury Secretary John W. Snow questioning a number of aspects of the deal. The extension deadline expires on March 14, according to reports. If CFIUS decides against the transaction, President Bush would need to clear the deal after a formal investigation is launched.

"If the problem is just cutting off physical access, this is the easiest thing in the world to fix," National Foreign Trade Council President Bill Reinsch told internetnews.com. "It is a research park and they have a decent vacancy rate. If the Chinese came in separately and wanted to open up an office there, I'm pretty sure the landlord would let them. This is an odd construct."

Reinsch said he expects the deal to clear CFIUS, but added the review may be taking longer than normal because it deals not only with national security but also proprietary technology.

Lenovo's new PC business includes IBM's "Think" brand notebook franchise and allows Lenovo to take a majority stake in the PC manufacturing portion of the International Information Products Company (IIPC) in Shenzhen, China, which is co-owned by IBM and Lenovo's rival Great Wall. The deal does not include IIPC's IBM eServer xSeries manufacturing in China.

The transaction creates the third-largest PC manufacturing company behind market leaders Dell and HP . According to IDC figures for 2003, the combined unit market share of Lenovo and IBM's PC businesses worldwide is approximately 8 percent.

One clue that things are progressing the way IBM wants it is an announcement that its partner Tech Data has extended its TechSelect Reseller program to its members for Lenovo.

"IBM has always been a leading advocate for the channel," Pete Peterson, Tech Data's vice president of Software and Systems Product Marketing said in a statement. "By working closely with distributors and resellers, Lenovo will help ensure the health and competitiveness of the channel, especially in the SMB [small to medium sized business] market."



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