Lenovo Asks U.S. for More Time on IBM Server Deal

NEW YORK (The Deal) -- Lenovo Group and International Business Machines  (IBM) appear to have asked U.S. national security regulators for more time to wrap up the review of Lenovo's planned $2.3 billion purchase of IBM's low-end server unit.

The move likely indicates that the companies need more time to finalize a national security mitigation agreement with the Committee for Foreign Investment in the U.S., or CFIUS, according to Farhad Jalinous, a Kaye Scholer partner who specializes in transactions with national security implications.

The acquisition is being reviewed by CFIUS, the Treasury Department-led panel that examines acquisitions of U.S. assets by foreign buyers for national security risks. The consensus among CFIUS lawyers when the deal was announced in January was that CFIUS would clear the transaction, possibly with mitigation agreements requiring Lenovo to firewall any segments that do business with defense or intelligence agencies.

The request for extra time was first reported by Bloomberg News.

"To me this signals that the parties are in the middle of negotiations with CFIUS over mitigation terms and need more time," Jalinous said.

Under federal law, CFIUS has a total of 75 days to review a transaction - first a 30-day initial examination and then a subsequent 45-day investigation if regulators believe it is warranted. At the end of the 45 days CFIUS must clear the transaction - with or without mitigation terms - or recommend that the President block the acquisition.

Jalinous said it is likely that the 45-day investigation will expire before the mitigation details can get worked out.


By submitting a new application, the companies can restart the clock on the CFIUS review.

Brion Tingler, a Lenovo spokesman, wouldn't address specifics of the investigation but forwarded a company statement stating that, "our efforts with IBM and global regulatory bodies remain on track. Our timeline is still the same as it was at the announcement: following clearance and approvals, we expect the deal to close by the end of the year."

IBM issued a statement stating that "both IBM and Lenovo support the CFIUS process and have been through it successfully before, and we look forward to a positive outcome."

Bloomberg noted Tuesday that the Lenovo review comes amid tension between the U.S. and Chinese governments over allegations here that members of the Chinese military have run a hacking operation to acquire trade secrets of U.S. companies and over China's more assertive territorial claims in regards to its neighbors. Bloomberg also reported that China is reviewing whether its banks' reliance on high-end servers from IBM compromises the nation's financial security. 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, Bloomberg reported.

Lenovo and IBM did not comment on the Bloomberg story.

Jalinous doubted that the current tensions with China will play a large role in the CFIUS review because concerns over the country's territorial claims and hacking allegations have been longstanding.

"CFIUS takes a holistic approach to national security risks and nobody could call it a curve ball that these tensions exist between the two countries," he said.

The IBM deal is one of two deals Lenovo has pending before CFIUS. Also under review is its $1.9 billion acquisition of the nonpatent assets of Google's (GOOGMotorola Mobility smartphone business. Tingler said that review is on track for conclusion by the end of the year as well.

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