IBMs decision to sell its PC business to Chinese computer maker Lenovo Group Ltd. is offering lessons both in how to expand into emerging markets and how federal regulators will view such deals.
Concerned that the $1.75 billion deal may represent national security threats, the Committee on Foreign Investments in the United States, or CFIUS, is considering reviewing the merger, which would create the third-largest PC vendor in the world. The interagency panel, chaired by the U.S. Department of the Treasury, reviews acquisitions of U.S. businesses by foreign companies.
CFIUS is interested in learning what technology will be transferred from IBM to Lenovo once the deal is closed next quarter. There also is concern that Chinese nationals could use IBMs PC facilities in Raleigh, N.C., to conduct industrial espionage.
A spokesperson for the Treasury Department declined to say whether CFIUS is taking action related to the deal. IBM spokesperson Edward Barbini, in Armonk, N.Y., said only that IBM had filed the required paperwork with CFIUS and is cooperating with regulators.
The deal involves Lenovo buying IBMs Personal Computer Division, including its ThinkPad laptops and ThinkCentre desktop PCs. The new entity will be based in Armonk, its top executives will be former IBM employees, and 10,000 of Lenovos 19,000 employees will come from IBM.
Experts say a review by regulators is warranted, given the size of the business being transferred and that China has historically been thought to have a hostile government.
“What kind of capabilities are we providing [through the deal]?” asked Michael Wessel, a member of the U.S.-China Economic and Security Review Commission, in Washington. “What advantages are we giving to China? To have this kind of scrutiny with this kind of deal is entirely appropriate.”
Simon Yates, an analyst with Forrester Research Inc., said that such investigations are not uncommon for mergers between U.S. and foreign companies.
“The difference here is we historically have had a policy preventing the flow of technology to unfriendly countries,” said Yates in Cambridge, Mass. “Im sure everybody wants to make sure to dot all their is and cross all their ts before we turn over all of this business and all of this [intellectual property] to a Chinese company.”
The deal needs the approval of CFIUS, to avoid a formal review, and the approval of President Bush.
Republican politicians are pushing for an extensive review. In a letter sent last week to Treasury Secretary John Snow, Reps. Duncan Hunter of California and Henry Hyde and Donald Manzullo, both of Illinois, said they are concerned that technology transferred from IBM to Lenovo could end up with the Chinese government.
“Given the relationship between so-called private companies in communist states and their government, we believe that it is manifestly in the public interest to extend the time for review by those agencies in the federal government responsible for defense, foreign policy and intelligence in order to ensure that there are no adverse national security ramifications of the sale,” the congressmen wrote in the letter.
Some experts believe there is little regulators can object to. Israel Shaked, a professor of finance and economics at Boston University, said PCs are built using commodity parts in every region of the world. IBMs ThinkPads and ThinkCentres are built in such places as Mexico, China, Malaysia and Brazil.
“Its like selling oranges to Russia during the Cold War days,” said Shaked, also a managing director of Boston-based The Michel-Shaked Group. “People are worried about it being a Chinese company. Here I see IBM selling a dog to the Chinese. It was a smart move. I dont consider the Chinese [a U.S.] ally, but selling them a commodity business, I dont see it as a problem.”
In addition, analysts said IBMs PC business doesnt bring with it a lot of innovation. The ThinkPads offer technology that protects the hard drive if the laptop is dropped, as well as encryption and fingerprint-reading capabilities. Whether that could be used by a foreign entity to threaten U.S. security is questionable, they said.
Those technologies could, however, still be used by IBM to mold the deal to regulators liking, Shaked said. IBM could decide not to transfer to Lenovo technology that regulators are worried about, he said.
Yates warned that pulling out too much could threaten the deal. “The more they pull out, the less appealing it could be to Lenovo in the first place,” he said. “What they really want is the intellectual property that goes with those ThinkPads and ThinkCentres.”
IBM customers are waiting to see what fallout comes from the federal wrangling. “Ill be surprised if it really affects things,” said Robert Rosen, president of the IBM enterprise user group SHARE and an eWEEK Corporate Partner, in Bethesda, Md. “The technology is very commoditylike, but I understand their concerns about being in a place for industrial espionage. Im just not sure how significant it is.”
What IBM gets
* Loss of a poorly performing business
* Greater access to Chinese market
* Sales, support and service revenue on products
* 18.9 percent stake in Lenovo
What Lenovo gets
* Access to IBM products, name and brands for five years
* Partner with global reach
* Greater access to PC markets beyond China