Lenovo, IBM Said to Seek Extension in U.S. Review of DealDavid McLaughlin, Alex Barinka and Edmond Lococo
Lenovo Group Ltd. and International Business Machines Corp. have sought more time for a U.S. national-security review of Lenovo’s planned purchase of IBM’s low-end server unit, according to a person familiar with the matter.
The companies resubmitted the transaction for review by an interagency panel called the Committee on Foreign Investment in the U.S., said the person, who asked not to be named because the process is confidential. The extended review gives regulators more time to scrutinize the proposed transaction as tensions between the U.S. and China rise over spying and hacking claims.
Extending the process gives Lenovo, based in Beijing, and IBM additional time to win approval from the U.S. Companies can pull their requests and refile them during or at the end of the standard 75-day inquiry by CFIUS, which examines acquisitions of U.S. companies by foreign investors to determine the effects on national security. The companies remain on track to complete the $2.3 billion deal by the end of the year, according to Lenovo.
Restarting the national-security review by CFIUS may indicate the companies are working toward an agreement with the committee to address security concerns raised by government agencies, said Timothy Keeler, a lawyer with Mayer Brown LLP in Washington.
“On big, sophisticated deals involving potentially sensitive sectors, it’s not uncommon,” he said about refiling with CFIUS. “Any China-related investment is going to be sensitive from a CFIUS standpoint. It doesn’t matter what the sector is.”
Lenovo shares fell 1.5 percent to close at HK$9.75 in Hong Kong trading today. IBM shares were little changed at $184.51 in New York.
The Lenovo review comes amid heightened tension in the U.S. over Chinese spying. The U.S. on May 19 accused five Chinese military officials of stealing trade secrets and other information from American companies.
“Given the current escalating situation, maybe one can expect delays,” said Dennis Lam, an analyst with DBS Vickers Hong Kong Ltd. “Failure to complete the deal on time will be viewed negatively in the market.”
China, meanwhile, is reviewing whether Chinese banks’ reliance on high-end servers from IBM compromises the nation’s financial security, Bloomberg News reported last week. Government agencies, including the People’s Bank of China and the Ministry of Finance, are asking banks to remove the IBM servers and replace them with a local brand as part of a trial program, people familiar with the matter said.
The stakes are high for IBM and Lenovo. The deal is a key piece of IBM Chief Executive Officer Ginni Rometty’s plan to stage a comeback amid sweeping changes in the technology industry. Customers are increasingly storing data and software on cloud-computing networks, rather than on site, limiting their use of servers and mainframes and the IBM consultants needed to install and maintain them.
“Both IBM and Lenovo support the CFIUS process and have been through it successfully before, and we look forward to a positive outcome,” Armonk, New York-based IBM said in a statement.
IBM and Lenovo were 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.
Offloading the x86 server division would remove a less profitable unit from IBM’s books, helping the company reduce its reliance on the struggling hardware business.
“It’s not strategic, it’s not a high-margin business and it’s very volume-dependent,” said David Grossman, an analyst at Stifel Nicolaus & Co. “They want to get this sold and focus on what they want to do in the rest of the hardware business.”
For Lenovo, the world’s largest maker of personal computers, the server deal represents a push into new businesses amid a global slump in the PC industry. The company has also agreed to buy Google Inc.’s Motorola Mobility unit.
“All regulatory approvals remain on track for year-end close,” said Brion Tingler, a Lenovo spokesman. He declined to comment more specifically on details of the CFIUS review process.
Refiling a transaction for a CFIUS review isn’t unheard of. In 2012, 114 notices of transactions were filed with CFIUS, and 22 of those were withdrawn, according to the committee’s most recent annual report. In 10 cases, parties refiled in 2012, and in two cases, the parties refiled in 2013.
‘Time Is Money’
In the remaining cases, the parties “abandoned the transaction for commercial reasons or in light of CFIUS’s national security concerns,” according to the report.
The IBM deal was expected to spark a close review in part because U.S. government agencies, including the U.S. Defense Department and the Department of Homeland Security, buy the IBM servers, according to an analysis by Bloomberg Industries. They are also used by the nation’s biggest telecommunications companies.
The decision to refile with CFIUS “does indicate that things haven’t gone smoothly,” said Harry Clark, a lawyer at Orrick, Herrington & Sutcliffe LLP in Washington.
“At some level some challenges have been encountered,” he said. “That could be anything from they were relatively modest and there’s time to get it all done and they may have clear path to getting it done, or it could mean it’s a desperate situation.”
Transaction reviews by CFIUS are increasingly requiring more time, said Nancy McLernon, president of the Organization for International Investment. Delays puts deals by foreign companies at risk, she said in interview.
“Time is money,” McLernon said. “Delays, whether they’re because of anything substantive or just because of resources, can be an inhibitor to cross-border transactions.”