Washington: Lenovo must convince government officials that buying a server unit from International Business Machines (IBM) won't give China back-door access to United States secrets and infrastructure.
The wrinkle is that the Pentagon, the FBI and the nation's biggest telecommunications companies buy the IBM servers, according to people familiar with the matter and an analysis by Bloomberg Industries.
Use of the servers by the government, telephone networks and other potentially sensitive customers will spark close scrutiny from the interagency group known as the Committee on Foreign Investment in the US (CFIUS), which investigates national-security risks of foreign acquisitions of domestic firms.
"It's kind of the perfect storm of issues," said Anne Salladin, a former Treasury Department official who worked on CFIUS reviews and is now at Stroock & Stroock & Lavan in Washington.
"Any foreign acquirer with this kind of asset purchase is very likely to be something that CFIUS would want to take a look at."
Beijing-based Lenovo, which announced the $2.3 billion IBM purchase on January 23, has formally sought approval for the deal from CFIUS, according to a person with knowledge of the matter.
Acquisition of US businesses by Chinese buyers are rising, increasing tension in Washington over Chinese access to US technology. CFIUS reviews can take as many as 75 days.
Lenovo fell 1 per cent to close at HK$8.91 in Hong Kong. The stock has lost 5.5 per cent this year after advancing 34 per cent in 2013.
Lenovo, which bought IBM's personal computer business in 2005, has been briefing officials on the deal, pointing out that it won't have access to the servers because IBM will continue maintenance on the equipment, according to a person familiar with the matter. That agreement lasts for five years and could be extended, said the person.
The service agreement may help ease the security review by CFIUS, which examined more than double the number of transactions by Chinese investors in 2012 than it did the previous year, making them the most scrutinised foreign buyers of American assets ahead of the UK, according to the committee's most
recent report to Congress.
"The government is going to take a look at the degree of penetration of the servers, where they are, how old they are, what the reach-back capability might be," Mario Mancuso, an attorney at Fried, Frank, Harris, Shriver & Jacobson. "Could they use the servers as a means of insertion into US government networks and data systems?"
The US officials will also examine any use of the servers in critical infrastructure, such as chemical plants and electric- utility companies, Michael Wessel, a member of the US-China Economic and Security Review Commission.
"Exfiltration and infiltration are the issues," Wessel said. "Can they get access to servers in some way and take data out or can they infiltrate the system to put in trap doors, viruses, malware or be able to take down systems in a potential conflict situation?"
Air Force Lieutenant Colonel Damien Pickart, a spokesman for the Pentagon, acknowledged that the Lenovo-IBM transaction is pending before CFIUS and added that the Defence Department, which is a member of the committee, would be involved in the deliberations. He declined to comment further and referred questions to Treasury, which chairs the committee.
Holly Shulman, a CFIUS spokeswoman, declined to comment. Spokesmen for the FBI and the Department of Homeland Security didn't respond to requests seeking comment.The servers are also embedded in telephone networks operated by AT&T, Verizon Communications Inc. and Sprint, according to three people familiar with the technology.
IBM spokeswoman Deirdre Murphy Ramsey did not comment on New York-based company's clients. IBM is prepared for a "comprehensive review" by CFIUS and is "confident of a positive outcome," she said.