Lenovo Dismisses US Security Concerns On IBM Buy

Lenovo’s IBM, Motorola buys come under the microscope

A month after word first emerged that Lenovo’s (HKEx: 992) mega-deal to buy IBM’s (NYSE: IBM) low-end server business was running into political headwinds, Lenovo is coming out and directly saying it expects to close the deal by the end of the year. Some of my sources near IBM are giving a similar message, even after a top Lenovo executive said last month that the ongoing cybersecurity spat between Beijing and Washington could derail the deal. Lenovo is also saying it expects to close its separate purchase of Motorola Mobility in the same time frame, marking the first time I’ve ever seen anyone imply that the purchase of that company from Google (Nasdaq: GOOG) might face any political headwinds.

If anything is clear from all these mixed signals, it’s that Lenovo’s two latest mega purchases are facing increased scrutiny from the Committee on Foreign Investment in the US (CIFIUS), the US agency that reviews all cross-border M&A for national security issues. As to whether CIFIUS will ultimately block either of these deals, I suspect the answer is “no”. Neither is particularly sensitive, though the IBM server deal could face some higher scrutiny since its servers are often used in larger IT systems.

The latest remarks on the issue are coming from the highest levels at Lenovo, where CEO Yang Yuanqing is saying he expects both deals to close by the end of this year. (English article; Chinese article) Yang made the comments at Lenovo’s annual shareholder meeting, and noted that the US Army and government are both the company’s clients — a situation he said wouldn’t change with the closing of either deal.

Lenovo announced its landmark agreement to buy IBM’s low-end server business early this year for $2.3 billion, marking its biggest ever overseas acquisition. It topped that figure a short time later when it announced it would buy faded cellphone superstar Motorola Mobility from Google for an even bigger $2.9 billion. (previous post)

Neither deal was considered very controversial at the time, but relations between Washington and Beijing have soured considerably since then over cybersecurity issues. The spat began with revelations about US cyberspying leaked last year by former government contractor Edward Snowden, and has grown with a steady stream of US accusations about cyber spying by Beijing. As a result of the friction, China has told some major state-owned companies to curtail their use of US-made IT equipment, and Washington has barred US telcos from buying networking equipment from Chinese giants Huawei and ZTE (HKEx: 763; Shenzhen: 000063).

Reports first emerged about a month ago that the IBM sale to Lenovo was facing intensified scrutiny in Washington, and a senior Lenovo executive even said that worsening cybersecurity relations could derail the deal. (previous post) Company watchers will recall that Lenovo’s equally landmark purchase of IBM’s PC assets in 2005 also came under similar political scrutiny in Washington, but was ultimately approved.

All of this means that 2 deals that once looked certain to close could now face some headwinds that could kill one or both. Of the pair, I honestly can’t see any reason for the US to veto the Motorola Mobility sale, no matter how bad relations get between Washington and Beijing. Mobile phones have never been a controversial area, and their status as a purely consumer product means they would be highly unlikely to pose any widespread security risk.

The IBM sale is a different issue, since servers are widely used in many IT systems. The fact that the US Army and government are buyers of those servers could also complicate matters. We saw something similar happen last year, when Chinese company Wanxiang bought bankrupt US high-tech battery maker A123 Systems, whose clients also included the US military. In that case Wanxiang solved the situation by not buying the part of A123 Systems that sold to the US military. I suspect we’ll see a similar compromise solution reached over any similar issues for this latest Lenovo-IBM deal, resulting in its ultimately approval.

Bottom line: Lenovo’s purchase of Motorola will get US national security clearance, while its pending purchase of IBM’s low-end server unit should also pass but may need some amending.

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