U.S. national security regulators has given the green light on Lenovo's attempt to purchase IBM's not-so-profitable x86 server business.
This represents a major win for the Chinese PC maker as the 150-day investigation conducted by the U.S. Treasury Department's Committee on Foreign Investment in the United States (CFIUS) is one of the last major regulatory hurdles for foreign companies who wish to invest in U.S.-based businesses.
The $2.3 billion deal, Lenovo's biggest acquisition if approved, faces intense scrutiny from U.S. regulators because of issues of national security. The Wall Street Journal earlier reported that the deal faces the possibility of being struck down by regulatory bodies because IBM's low-technology x86 servers are used to maintain the Pentagon's networks. As per the terms of the deal, Lenovo will maintain these servers and U.S. security officials have raised concerns that, under Lenovo, the servers could be penetrated by Chinese hackers and spies.
Lenovo, however, has launched a major public relations campaign to convince regulators of its purely commercial intent to acquire IBM's server business, which it sees to be very profitable in the Chinese market as more and more Chinese companies look to local manufacturers to purchase their IT equipment due to increasing concerns about U.S. surveillance.
U.S. regulators have been increasingly wary of Chinese technology firms. In October 2012, Congress issued a warning advising the public to refrain from networking equipment from Huawei or ZTE firms, saying that these products posed a threat to national security.
However, Lenovo has been dealt a lucky card, as it had gone through the CFIUS process three times in the past and has successfully received approval. In 2005, the company went through the same rigorous investigations for its attempt to purchase IBM's PC business for $1.25 billion. A number of sensitive U.S. government arms, however, continue to decline using Lenovo's products. As for its latest attempt to purchase a U.S.-based business, sources cited by Bloomberg claim that IBM has agreed to provide continuing maintenance for the Pentagon servers for five years, which has greatly allayed national security fears on the U.S. side.
Both Lenovo and IBM hope to close the deal, which was struck in January this year, by the end of 2014. The regulatory approval is good news for IBM, which continues to offload its declining hardware business to focus on newer technology such as cloud computing and data analytics.
"This is part of IBM's process moving away from hardware manufacturing to a more service-oriented product line and more profitable product lines," says Ivan Feinseth, chief investment officer at Tigress Financial Partners. "There are trying to change the direction they are going."
