China-based PC maker Lenovo is acquiring IBM's low-end server business for a meager $2.3 billion. The deal, however, will reportedly be the biggest overseas acquisition by the Chinese company.
IBM and Lenovo had entered into talks in spring 2012 on possible acquisition of IBM's server business by the latter, but the talks broke down over price.
Lenovo now can thank NSA whistleblower Edward Snowden for the acquisition as the security concerns raised by his revelations had an adverse effect on IBM's sales in the Chinese market and Lenovo's ownership of the business may help win back customer confidence.
The sale of the low-end IBM servers, however, is still awaiting clearance from the U.S. government i.e. the Committee on Foreign Investment in the United States (CFIUS), which is responsible for protecting U.S. national security. Sensitive acquisitions or mergers that involve foreign parties require approval from the CFIUS as they may have repercussions on national security.
"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."
However, lawyers specializing in U.S. security issues are of the opinion that the details of the Lenovo-IBM deal will be examined closely by regulators, which may delay the same for several months. A possibility exists that the deal may even be "impossible to complete," per the WSJ.
In the event a clearance is received, IBM would be able to divert its attention to software services which are more profitable. Analysts are optimistic that the Lenovo-IBM deal will get approval. In the past, Lenovo's acquisition of IBM's notebook division has also faced scrutiny but it finally got approved.
"It's fair to say that this deal is more likely to get through CFIUS without major problems than the 2005 transaction," said John Reynolds, a partner at law firm Davis Polk & Wardwell in Washington, D.C.
Christopher Padilla, VP of governmental programs for IBM, seemed optimistic and revealed that a joint voluntary submission to CFIUS will be made by both parties in the near term. "Both IBM and Lenovo support the CFIUS process and have been through it before," said Padilla. "We look forward to that process and are confident of a positive outcome."
Padilla also said that U.S. government agencies currently deploy some IBM servers, but he declined to identify which ones.
The IBM deal will increase Lenovo's share in the server market from 2 percent to 14 percent.