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IBM Predicts Success in U.S. Review of Lenovo Deal

January 23, 2014

IBM Predicts Lenovo Server Deal Will Clear U.S. Security Review

An employee walks past rows of racks being built and prepared for usage stand inside pod two of International Business Machines Corp.'s (IBM) Softlayer data center in Dallas. Photographer: Ben Torres/Bloomberg

International Business Machines Corp. (IBM:US) is confident the $2.3 billion purchase of its server unit by China’s Lenovo Group Ltd. (992) will clear a U.S. national-security review, an IBM executive said.

The companies will submit information soon on the bid to the Committee on Foreign Investment in the United States, Christopher Padilla, IBM’s vice president for governmental programs, said yesterday in an interview. The inter-agency committee led by the Treasury Department reviews foreign-company purchases of U.S. assets for national-security concerns.

“It’s not like this is some unique, choke-point technology being sold to a Chinese firm,” Padilla said by telephone. “We’re quite confident of a positive outcome.”

Related: Lenovo to Buy IBM Server Unit for $2.3 Billion Amid Slump

Lenovo is planning to buy IBM’s x86 server business as Chinese investment in the U.S. expands and tensions over cyber intrusions mount between the nations, the world’s two largest economies. Proposed deals by Chinese companies accounted for about 20 percent of the 114 reviewed by the panel in 2012, supplanting the U.K. as the most scrutinized nation.

The IBM servers link computers on corporate networks and are essentially commodities in the information technology world, Padilla said. Most of IBM’s x86 servers are being made in Shenzhen, China, he said.

Service Agreements

“The broad utilization of IBM’s servers by the U.S. government and in critical infrastructure operations should certainly require a CFIUS review,” Michael Wessel, a member of the U.S.-China Economic and Security Review Commission, said in an e-mailed statement. “That review must cover not only the purchase of the company’s operations but the implications of Lenovo taking over service agreements for existing clients.”

Padilla said a few of the IBM servers are used by U.S. government agencies, which he declined to identify.

CFIUS probably will approve the transaction because most of the devices are already made in China and the technology is standard among competitors such as Hewlett-Packard Co. (HPQ:US) and Dell Inc., Padilla said.

“I could probably build one of these,” James Lewis, a senior fellow for at the Center for Strategic and International Studies in Washington, whose work focuses on cybersecurity, said by phone. “It’s mass-market thing.”

Companies such as Google Inc. (GOOG:US) and Facebook Inc. (FB:US) build similar products for their own use, he said.

Encryption Technology

Lewis said the IBM servers don’t pose the type of national-security risk that may occur if a Chinese company were to buy a U.S. company making encryption technology or the giant routers that make up the backbone of the Internet.

“If the U.S. government doesn’t want to buy from Lenovo, it’ll be easy for them to find someone else,” said Lewis, the analyst.

Steve Mills, senior vice president of software and systems for IBM, said in an interview that the components for the servers are made by companies with a strong Asian presence.

“A lot of the assembly work of putting those systems together is moving to Asia as well,” he said.

Padilla, who was the Commerce Department’s under secretary for international trade during President George W. Bush’s administration, also said the companies have been through the CFIUS review before, when Lenovo bought IBM’s personal computer business in 2005.

“This is a known and trusted quantity in terms of the purchaser,” he said.

To contact the reporter on this story: Brian Wingfield in Washington at bwingfield3@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net


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