Security Objections to IBM-Lenovo Deal?

Concerns over corporate espionage could ultimately block IBM’s sale
of its PC division to China’s Lenovo Group, according to a Bloomberg News
report this week.

Members of the U.S. Department of Treasury’s Committee on Foreign
Investments in the United States (CFIUS), along with the Department of
Justice (DoJ) and Department of Homeland Security, are reportedly expressing
concerns that Chinese spies potentially working undercover at U.S. IBM
manufacturing plants, unnamed sources told Bloomberg

The fear, according to the report, is that employees working
in U.S. plants would use their knowledge for China’s military gain.

IBM and Lenovo are negotiating the deal this week with CFIUS. IBM
spokesman Edward Barbini said the company has filed the required legal
notice with the 11-member committee and is “following all the normal
and routine procedures in the review of this transaction.”

A CFIUS review determines whether a particular acquisition by a
foreign country has national security issues. This review is potentially
the last barrier to allowing the $1.75 billion IBM-Lenovo transaction.

Earlier this month, the Federal Trade Commission gave the deal a green
light by dismissing the usual waiting period given by the FTC and the
DoJ to make sure an acquisition complies with
antitrust laws.

A spokesperson for the Treasury Department declined to comment on the
CFIUS review, the press report or the timeframe for the investigation.

If CFIUS decides against the transaction, President Bush would need
to clear the deal after a formal investigation is launched.

But National Foreign Trade Council president Bill Reinsch said he
thinks the security fears are unfounded, noting that it’s just PC
technology being sold and physical security is easily addressed.

“Companies doing business overseas like IBM have extensive experience
in blocking access to their property,” Reinsch told “What seems to be forgotten is that IBM has a
stake in the company, too, and the last thing IBM wants is a competitor on
the high-end.”

More than likely, Reinsch said different departments are hoping to
prevent the deal from passing for economic reasons, such as the $60.3
billion U.S. trade deficit, but are hiding under the cloak of national

“The CFIUS process gives the president the authority to block the
transaction, but only in matters of national security. The president
cannot block a deal from happening if it is based on economic reasons,”
Reinsch said.

If the complaints came from top U.S. Pentagon officials like
Secretary Donald Rumsfeld or Deputy Secretary Paul Wolfowitz, Reinsch
noted, it would be a different story, considering the Pentagon still
views China as a military threat. A spokesman for the Department of
Defense was not immediately available for comment.

Reinsch said the deal is likely to clear a CFIUS review, considering
the council has only denied one transaction in 17 years — one that
involved a Chinese company acquiring aircraft parts. CFIUS could also
attach some provisions to the deal, but even that happens infrequently,
Reinsch said.

IBM maintains selling its PC division to Lenovo may make it a
more nimble entity. The company has made no secret that it plans to tighten its
focus on selling servers, software and services to corporate companies.
Most experts agree this focus has more growth opportunity than trying to
make money in the saturated PC market segment.

As part of the deal, IBM will still maintain an 18.9 percent stake in
Lenovo, the leading PC maker in China. Lenovo’s corporate headquarters
will relocate from China to New York, with major hubs in Beijing and
Raleigh, N.C.

If the transaction goes through, Lenovo
executives are committing themselves to adding about 10,000 current IBM
employees — more than 40 percent of whom already are in China and less
than 25 percent of whom are in the United States. After the five-year
transition, Lenovo will have 19,000 employees on the payroll.

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