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IBM offers concessions on Lenovo PC deal

Sales assistants waiting for customers at a retail outlet of Lenovo, China's largest computer manufacturing company, in Beijing. PHOTO: AFP

International Business Machines Corp offered US 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 (聯想), people familiar with the matter said.

IBM made the proposal yesterday to the Committee on Foreign Investment in the US, the government body that must approve the US$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 US 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 US facilities for espionage.

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 US 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 US General Services Administration, Lenovo gains the US 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 US 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.

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 US 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.

Under US 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.
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