International Business Machines Corp (IBM) cleared a US national security review for the sale of its low-end server business to China’s Lenovo Group Ltd (聯想), letting the US$2.3 billion transaction go forward even amid tensions between the two nations.
The conclusion of the review by the Committee on Foreign Investment in the US is “good news for both IBM and Lenovo, and for our customers and employees,” IBM said on Friday in a statement.
While the committee placed some conditions on the deal, they are not set to significantly affect the business and the terms of the transaction have not changed as result, a person with knowledge of the matter said, without specifying the conditions.
The sale drew scrutiny because of disputes between China and the US, the world’s two largest economies, over cyberintrusions. By completing the deal, IBM can get rid of a less profitable business to focus on growing areas, such as cloud computing and data analytics, while giving Lenovo a bigger piece of the global computer hardware market.
“This is part of IBM’s process moving away from hardware manufacturing to a more service-oriented product line and more profitable product lines,” Tigress Financial Partners LLC chief investment officer Ivan Feinseth said in an interview. “They are trying to change the direction they are going.” He has a neutral rating on IBM stock.
The IBM servers, known as x86 for the type of chips they use, link computers on corporate networks and are essentially commodities in the information technology world, IBM’s vice president for governmental programs Christopher Padilla said in January. Most of IBM’s x86 servers are made in Shenzhen, China, he said.
The clearance of the US national security review could also bode well for Lenovo’s separate US$2.91 billion purchase of Google Inc’s Motorola Mobility unit.
“We continue to work through a number of regulatory and business processes to ensure an effective and timely closure on both deals,” Lenovo said in a statement. “We remain on track to close both deals by the end of the year.”
US government agencies including the US Department of Defense and the US Department of Homeland Security buy the IBM servers, according to Bloomberg Intelligence. The companies were able to head off a lot of government concerns on the x86 deal because IBM has agreed to continue maintenance on existing servers for five years, said the person with knowledge of the matter, who asked not to be identified because the process was private.
The committee’s review took 150 days to complete, with the companies forced to resubmit the transaction after an initial 75-day investigation expired, the person said. The committee asked hundreds of questions during the probe, primarily focusing on maintenance of installed IBM servers and Lenovo’s access to them, while also paying heed to heightened concern and scrutiny about any transactions with Chinese firms in the US technology sector, the person said.
The Committee on Foreign Investment in the US examines acquisitions of US companies by foreign investors to determine the effects on national security. The US on May 19 accused five Chinese military officials of stealing trade secrets and other information from US companies.
Lenovo was successful in getting the committee’s approval in 2005 for an earlier deal, in which the Chinese company acquired IBM’s PC unit for US$1.25 billion.
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