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    Greater China
     Jan 25, 2005
US sees a spy in China's Lenovo

WASHINGTON - In a potentially damaging move for Sino-US business relations, American regulators are reportedly blocking IBM's proposed $1.25 billion sale of its personal computer business to the Lenovo Group of China, on national security concerns.

Citing unnamed sources "familiar with the matter", Bloomberg reported on Sunday that members of the Committee on Foreign Investments in the United States (CFIUS) are concerned that Lenovo employees might be used to conduct industrial espionage. According to the report, these members are worried that Chinese operatives may use an IBM facility in North Carolina to launch industrial espionage to further China's military technology. The Chinese government has a majority share in Lenovo, formerly known as Legend. Incidentally, the US recently sanctioned eight Chinese companies for exporting technology to Iran for use in a missile program, according to a recent New York Times report.

CFIUS comprises 11 US agencies, including the Department of Justice and the Department of Homeland Security, and is chaired by the Treasury Department. The influential committee has the ability to veto the deal and could also launch an investigation into the implications of such a deal. IBM had earlier this month said that it had filed for CFIUS approval as part of the necessary regulatory approvals it was seeking to formalize the deal. The Lenovo sale got a US anti-trust clearance earlier this month.

Lenovo and IBM formally filed a notice seeking CFIUS clearance on December 29, according to the unnamed sources. US law stipulates that if the committee doesn't approve a foreign takeover in 30 days, it must open a formal investigation and finally take the matter the US president for a decision. "Because of national security concerns, we do not comment on matters that may be under review by the Committee on Foreign Investment," Treasury spokesman Tony Fratto was quoted as saying. The committee never reveals whether it's studying a certain transaction or the decisions it takes on them.

IBM and the government are negotiating the matter, the sources told Bloomberg. "IBM has filed a required notice with the Committee on Foreign Investments," Edward Barbini, a spokesman for IBM Corp of Armonk, New York, was quoted as saying. "IBM is fully cooperating with all government agencies in their review of this transaction." In a statement, Lenovo spokeswoman Alice Li said: "Lenovo continues to fully cooperate with relevant authorities." Treasury Department spokesman Rob Nichols declined to comment, so did Chinese government officials in Beijing.

CFIUS, which reviews takeovers of US firms by foreign entities to ensure that the deals do not endanger US national security, has previously blocked similar acquisitions by companies with links to China. In 2003, it scrapped the sale of Global Crossing to Hutchison Whampoa Ltd, the Hong Kong conglomerate controlled by billionaire Li Ka-shing, because of national security concerns raised by Chinese control of the company's global undersea cable communications network.

According to the terms of the IBM-Lenovo contract, touted as the most ambitious attempt by a Chinese company to penetrate the American market, IBM will would get $650 million in cash and $600 million in Lenovo stocks to hold a 18.9% stake in the Chinese state-controlled computer major. Lenovo would move its PC business headquarters to New York from Beijing, combining the 9,500 IBM personal-computing division employees with its own 10,000 workers. Lenovo's operations were to be jointly run from Research Triangle Park, North Carolina, where the design and marketing of IBM PCs is centered, and from Beijing, where Lenovo is headquartered.

IBM's PC division hasn't made money in over three years now. It posted a net loss of $139 million in the six months ended June 30 and its shares have fallen 3.9% since. During the past four years, IBM's PC operation has lost about $1 billion, according to a Securities and Exchange Commission regulatory filing. IBM has not been manufacturing its own PCs for many years now, getting most of its products made by partners largely in China. But despite operating at a loss, IBM was supposedly the third-largest vendor worldwide for PCs in 2004, with 5.5% market share. The combined Lenovo/IBM was expected to command a market share of about 8%, making it the third-largest PC supplier worldwide. Lenovo is 57% controlled by Legend Group, which was established in 1984 by the Chinese Academy of Sciences, a government institution.

Lenovo is now raising $1.2 billion to help it complete the deal. Lenovo, along with China Eastern Airlines Corp that's seeking $225 million to purchase planes, epitomizes the growing transnational ambition of Chinese companies. Chinese companies spent $4.1 billion buying overseas companies last year, up from $2 billion in 2003.

Reports of the US hurdle, surprisingly, pushed up shares of Hong Kong-traded Lenovo by 5%. Lenovo's shares have shed around 20% since it announced the deal last month as the market has generally viewed the deal negatively because of IBM's recent history of losses in its PC venture.

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Uphill task for Lenovo (Dec 24, '04)

Lenovo's $1.25bn splurge on IBM (Dec 9, '04)

Lenovo stocks drop on doubts over IBM deal (Dec 11, '04)


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