Sino-US Cyber Wars Threaten IBM-Lenovo Deal

IBM-Lenovo deal in danger of derailing

Chinese workers who quit their jobs at IBM (NYSE: IBM) this spring rather than take new positions at Lenovo (HKEx: 992) under an M&A deal may be regretting their decision, with word that the deal may derail due to US national security concerns. Of course I’m being just a tad facetious with my comment about the former IBM workers, but I’m quite serious about the doubts that are suddenly swirling around the deal announced early this year for IBM to sell its low-end server business to Lenovo. The latest reports are a bit more neutral, though I would now give the deal just a 50 percent chance of getting clearance from the US national security regulator.

If I were an optimist, I might even argue that a collapse of the deal would be a good thing. Sentiment against IBM was already starting to turn negative in China, following reports late last month that Beijing was urging banks to avoid the US company’s hardware due to potential security risks. (previous post) What’s more, I personally think Lenovo has acquired more assets recently than it can easily digest, so the addition of one less major purchase could help to ease any future indigestion.

Still, this latest news doesn’t bode too well for broader Sino-US relations in the technology space, which has been filled with multiple accusations over the last year about cyber spying by both sides. Against that backdrop, let’s take a closer look at the reports coming out from various media on the latest twist in Lenovo’s previously announced deal to buy IBM’s x86 server business for $2.3 billion.

The one thing we can say with certainty is that IBM and Lenovo are seeking to extend the deadline for completing the deal, according to the reports, which cite unnamed sources. (English article; Chinese article) One report says the extra time is needed for a review by the Committee on Foreign Investment in the US, known as CFIUS. That implies the US regulator that reviews such cross-border deals for national security risk may be having concerns about the sale.

Another Chinese media report cites Lenovo senior vice president Chen Xudong saying that worsening Sino-US relations in the area of cybersecurity could ultimately derail the deal. (English article) Chen added that he was still optimistic that the sale would be completed, though one would expect a senior company executive to publicly express that kind of optimism.

The Sino-US relationship has been marred by claims from both sides related to cybersecurity threats over the past year. Washington has barred Chinese telecoms giants Huawei and ZTE (HKEx: 763; Shenzhen: 000063) from selling their networking equipment into the US over security concerns, and has made repeated complaints about official cyberspying by Beijing.

Many of Beijing’s complaints are related to revelations from former US intelligence worker Edward Snowden, including word that Washington used its cyber skills to spy on Huawei. China reportedly cautioned big state-run companies last year against using equipment from US networking equipment giant Cisco (Nasdaq: CSCO), and now it appears to be targeting IBM as well by warning banks to avoid the computing giant’s equipment.

All that said, the bigger 2 questions are: What’s likely to happen with the IBM-Lenovo deal, and where do all the cyberspying allegations end? As I’ve said above, the IBM-Lenovo deal may only have a 50 percent chance of passing at this time, mostly due to the political tensions. As to the bigger picture, the current round of cyber accusations is likely to continue for the rest of this year and even into the first half of 2015. Chinese and US tech companies are likely to take a hit to their sales during that time, though things could return to more normal levels when tensions finally start to subside in the second half of next year.

Bottom line: IBM’s sale of its low-end server business to Lenovo stands only a 50 percent chance of completion due to growing tensions between the US and China over cybersecurity.



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