Bloomberg News

IBM Obtains U.S. Approval for Sale of Server Business to Lenovo

August 15, 2014

International Business Machines Corp. (IBM:US) cleared a U.S. national-security review for the sale of its low-end server business to China’s Lenovo Group Ltd. (992), letting the $2.3 billion transaction go forward even amid tensions between the two nations.

The conclusion of the review by the Committee on Foreign Investment in the U.S., or Cfius, is “good news for both IBM and Lenovo, and for our customers and employees,” Armonk, New York-based IBM said yesterday in a statement. While Cfius placed some conditions on the deal, they don’t significantly affect the business, and terms of the transaction didn’t change as result, a person with knowledge of the matter said, without specifying the conditions.

The sale drew scrutiny because of disputes between China and the U.S., the world’s two largest economies, over cyberintrusions. By completing the deal, IBM can jettison a less profitable business to focus on growing areas, such as cloud computing and data analytics, while giving Lenovo a bigger piece of the global computing-hardware market.

“This is part of IBM’s process moving away from hardware manufacturing to a more service-oriented product line and more profitable product lines,” Ivan Feinseth, chief investment officer at Tigress Financial Partners LLC, said in an interview. “They are trying to change the direction they are going.” He has a neutral rating on IBM stock.

Spokesmen for IBM and Lenovo declined to comment on whether the Cfius clearance included any requirements or concessions. Holly Shulman, a spokeswoman for the Treasury Department, which leads Cfius, declined to comment.

Essentially Commodities

The IBM servers, known as x86 for the type of chips they use, link computers on corporate networks and are essentially commodities in the information technology world, Christopher Padilla, IBM’s vice president for governmental programs, said in January. Most of IBM’s x86 servers are made in Shenzhen, China, he said.

The clearance of the national-security review may also bode well for Lenovo’s separate $2.91 billion purchase of Google Inc.’s Motorola Mobility unit.

“We continue to work through a number of regulatory and business processes to ensure an effective and timely closure on both deals,” Lenovo, which has its headquarters in Beijing and Morrisville, North Carolina, said in a statement. “We remain on track to close both deals by the end of the year.”

Maintenance Continues

U.S. agencies, including the Defense Department and the Department of Homeland Security, buy the IBM servers, according to Bloomberg Intelligence. The companies were able to head off a lot of government concerns on the x86 deal because IBM has agreed to continue maintenance on existing servers for five years, said the person with knowledge of the matter, who asked not to be identified because the process was private.

The Cfius review took 150 days to complete, with the companies forced to resubmit the transaction after an initial 75-day investigation expired, the person said. Cfius asked hundreds of questions during the probe, primarily focusing on maintenance of installed IBM servers and Lenovo’s access to them, while also paying heed to heightened concern and scrutiny about any Chinese transaction in the U.S. technology sector, the person said.

Cfius examines acquisitions of U.S. companies by foreign investors to determine the effects on national security. The U.S. on May 19 accused five Chinese military officials of stealing trade secrets and other information from American companies.

More Examination

Lenovo was successful in getting Cfius approval in 2005 for an earlier deal, in which the Chinese company acquired IBM’s personal-computer unit for $1.25 billion.

Cfius examined more than double the number of transactions by Chinese investors in 2012 than it did the previous year, making them the most scrutinized foreign buyers of American assets ahead of the U.K., according to the committee’s most recent report to Congress.

Lenovo had agreed to pay a fee more than double the typical size should it fail to acquire IBM’s low-end server unit, people familiar with the matter said in January. The breakup charge of about $200 million, according to one of the people, highlights the risk the Chinese company has chosen to bear for its largest-ever purchase.

To contact the reporters on this story: Alex Barinka in New York at abarinka2@bloomberg.net; David McLaughlin in Washington at dmclaughlin9@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net Crayton Harrison, John Lear


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