Lenovo's Motorola, IBM server buys will likely get strict U.S. security review

Any U.S. probe into the Chinese firm's plan to acquire U.S.-developed technology "is not going to be resolved any time soon," attorney says

Beijing-based Lenovo Group's plan to buy Google's Motorola Mobility unit and an IBM server division for a combined $5.2 billion will likely face strict and lengthy national security scrutiny by an inter-agency committee of the U.S. government, two Washington attorneys who are veterans of the review process said Thursday.

"The announced acquisition of Motorola's smartphone business by Lenovo -- which is part-owned by the Chinese government -- is a national security trifecta. This is not going to be resolved anytime soon," said Christopher Brewster, an attorney at Stroock & Stroock & Lavan in Washington. Brewster has more than 30 years experience representing companies making U.S. investments.

Lenovo is expected to face the Committee on Foreign Investment in the U.S. (CFIUS, often pronounced "sifius"), an inter-federal agency committee tasked with reviewing -- in secret -- the national security implications of foreign investments in U.S. companies and operations.

The committee is chaired by the Secretary of the Treasury and has representatives from 16 federao agencies and departments, including the Defense Dept., the State Dept., the Commerce Dept., and the Homeland Security Dept.

Created in 1975, CFIUS can recommend the U.S. president block a foreign investment, which occurred most recently in 2012 when President Barack Obama ordered the Chinese Sany Group to divest itself of four small wind farms deemed to be too close to a U.S. Navy weapons system training station in Boardman, Ore.

Both the proposed Motorola deal, valued at $2.9 billion, and the $2.3 billion agreement to buy the IBM x86 server business "would be the typical kinds of transactions for CFIUS to look at and could raise concerns," Brewster said.

Brewster said any foreign government-controlled company investing in a U.S. company is almost automatically reviewed by CFIUS. The Legend Group, backed by the Chinese Academy of Sciences, owns a 32.34% stake in Lenovo, Brewster added.

A key issue for CFIUS would be whether there will be any U.S. government users of Lenovo/Motorola smartphones and if so, are they used in sensitive jobs, said Anne Salladin, also an attorney at Stroock. Salladin handled more than 500 CFIUS cases while a senior counsel at the Treasury Department.

Even if Lenovo said they wouldn't sell smartphones or servers to U.S. government agencies, "how will anybody know? And even harder to know is what about all the government contractors?" Salladin said.

Brewster and Salladin said that Lenovo's purchase of the IBM ThinkPad division nearly a decade ago was reviewed by CFIUS and approved, but noted that the decision came long before the security lapses of the last year involving classified National Security Agency data leaks by Edward Snowden.

"The way the world looked back when the ThinkPad deal was done, there was no Edward Snowden and not a concern with the NSA," Brewster said. "Technology was in a different place."

CFIUS has become "a lot more aggressive with its reviews" in recent years, Brewster said.

Part of the analysis that CFIUS will make of the Lenovo deals involves how vulnerable are the U.S. businesses being acquired, Salladin said.

Public companies do disclose that they are filing for a CFIUS review, but CFIUS is not likely to comment. A CFIUS review can last up to five months, Brewster said.

In 2012, China-based Huawei Technologies and ZTE came under U.S. government scrutiny for selling networking servers in the U.S.

The U.S. House Intelligence Committee said in a report that the firms posed a threat to national security because they could have been influenced by the Chinese state government to undermine U.S. security. Committee members advised American companies to find other vendors.

That recommendation was derided by many analysts as political, and not necessitated by a security need.

Both ZTE and Huawei now sell mobile phones in the U.S. in relatively small numbers, compared to Samsung and Apple.

Some analysts believe Lenovo's purchase of Motorola will get a green light from U.S. officials. There doesn't appear to be cryptography technology involved in the Motorola handsets, and there's a healthy and competitive market for various smartphones and cell phones in the U.S., said Avi Greengart of Current Analysis.

"I can't imagine why [government regulators] would object," Greengart said.

Chetan Sharma, an analyst at Chetan Sharma Consulting, did wonder whether the Motorola deal will gain U.S. approval, especially following Canada's opposition to the bid by Lenovo for BlackBerry, based in Waterloo, Ont.

He also noted that Lenovo was allowed to buy the IBM PC business in 2005 but that was before the Snowden leaks and the recent rise in convcern over network security and privacy issues. "There is some precedent [for approval], but times have changed in the last 10 years," Sharma said.

Lenovo didn't comment on the expected security reviews.

IDG News Service reporter Stephen Lawson contributed to this report.

Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld. Follow Matt on Twitter at @matthamblen, or subscribe to Matt's RSS feed . His email address is mhamblen@computerworld.com.

mhamblen@computerworld.com.

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