Feb. 24 (Bloomberg) -- International Business Machines Corp. offered U.S. national-security regulators a set of concessions aimed at overcoming objections to the sale of its personal-computer unit to China's Lenovo Group Ltd., people familiar with the matter said.

IBM made the proposal yesterday to the Committee on Foreign Investment in the United States, the government body that must approve the $1.25 billion sale. After a three-hour meeting in Washington, the committee failed to reach a decision on whether IBM's offer goes far enough, the people said.

The concessions include preventing Lenovo from knowing the names of IBM's U.S. government customers, physically sealing off buildings in a shared office park and moving thousands of employees to other locations. If put into place, they could put the PC unit at a competitive disadvantage to such rivals as Dell Inc. and Hewlett-Packard Co., said Andrew Neff, a Bear Stearns & Co. analyst who follows the computer industry.

``There's no question they would use this to try to siphon off sales,'' Neff said in an interview.

Lenovo agreed to buy IBM's PC division on Dec. 7. The foreign- investment committee, which is known as CFIUS and chaired by the Treasury Department, decided on Jan. 27 to began a formal investigation over concerns that the Chinese government will use Lenovo-made PCs and the company's new U.S. facilities for espionage.

Approved Vendor

CFIUS may meet again this week to resume deliberations, the people familiar with its probe said.

``We're cooperating in every way with the government in this process and we're pretty confident about the outcome,'' IBM spokesman Clint Roswell said.

Lenovo spokesman Guo Tongyan refused to comment when reached in Beijing, citing only what Lenovo's President Yang Yuanqing said on Jan. 28: ``Lenovo will cooperate with all relevant government agencies and that we believe the IBM/Lenovo deal is of mutual benefit for both the U.S. and China.''

Under the sale agreement, Lenovo will get to use IBM's brand and the Armonk, New York-based company will be a reseller. Also, because IBM is approved as a computer vendor by the U.S General Services Administration, Lenovo gains the U.S. government as a customer by acquiring the PC business, the people familiar said.

That concerned members of the committee from the Department of Homeland Security and the Justice Department, who demanded that IBM protect any information the Chinese could use to bug or infiltrate computers used by U.S. officials, the people said.

``We do not comment on matters that may or may not be before CFIUS,'' Treasury Department spokesman Rob Nichols said.

The members spelled out their position in a meeting last week in Washington with Stephen Ward, the head of IBM's PC unit, according to the people, who spoke on condition of anonymity. Ward is slated to become Lenovo's chief executive after the sale.

North Carolina Facility

The Justice Department and the Department of Homeland Security also have raised concerns over an IBM facility in Research Triangle Park, North Carolina. They questioned whether Chinese operatives could use the facility, which Beijing-based Lenovo plans to use as its operational headquarters for the PC business, to engage in industrial espionage, the people said.

Agents from the U.S. Secret Service and the Federal Bureau of Investigation inspected the Research Triangle site earlier this month, and IBM offered to take measures such as closing its buildings in the office park to access by Lenovo employees, the people familiar with the probe said.

IBM balked at other demands. In a proposal that CFIUS considered yesterday, the company refused to agree not to transfer any employees involved in research and development to the Research Triangle site and objected to some security measures, such as installing new safety doors, the people said.

Presidential Approval

Under U.S. law, CFIUS is required to report the results of its investigation to President George W. Bush for a decision on the sale. The deadline for the committee to complete its 45-day probe is March 14, according to the people familiar.

In past investigations, CFIUS has allowed companies to withdraw their applications and then refile to include new terms or measures designed to address any regulatory concerns, according to a September 2002 report by Congress's General Accounting Office, now the Government Accountability Office.

By refiling after negotiating an agreement with CFIUS, a company may avoid having the case submitted to Bush, said James Bodner, who oversaw national-security reviews when he was principal deputy undersecretary for policy under former Defense Secretary William Cohen.

IBM has hired consultants to help secure approval from CFIUS, including Brent Scowcroft, the former national-security adviser to President George H. W. Bush and Gerald Ford.

Terms

The company also retained Bruce Mehlman, who served as President George W. Bush's assistant secretary for technology policy at the Department of Commerce until January 2004, and partners at D.C.-based law firm Covington & Burling. They include Mark Plotkin and David Marchick, a former deputy assistant secretary for trade policy at the State Department, according to federal lobbying records.

Should the sale be approved, Lenovo will pay IBM $650 million in cash and $600 million in stock, and assume $500 million of debt. The transaction would expand Lenovo's PC business fourfold, giving it annual revenue of about $12 billion. The Chinese company also would gain the rights to use IBM's brand for five years and a distribution and sales network covering 160 countries.

Lenovo's parent, Legend Group, was established in 1984 by the Chinese Academy of Sciences, a government institution.

To contact the reporters on this story: Otis Bilodeau in Washington at obilodeau@bloomberg.net.

Last Updated: February 24, 2005 01:08 EST