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Lenovo rolls the dice twice on US national security clearance for Motorola and IBM deals

Lenovo’s surprise deal to buy the Motorola smartphone business from Google is the Chinese firm’s second high-profile acquisition of an American business, coming a few days after it agreed to take over IBM’s low-end server unit. As for any purchase by a foreign company, Lenovo will need national security clearance from the US government for the deals to go ahead—and with China, internet infrastructure, and mobile phones involved, it’s going to be a contentious process.

The decision will be made by the Treasury Department’s Committee on Foreign Investment in the US (CFIUS), an interagency panel authorized to block deals if they threaten US national security. The firm has vetoed more than a few Chinese acquisitions in recent years—Lenovo’s rival Huawei had one small deal blocked by CFIUS and it was strongly discouraged from a much larger buyout of 3Com. And those deals were relatively low profile, without the involvement of a historic American brand name like Motorola—the company that invented the mobile phone in the first place.

The climate for Sino-US telecoms deal has gotten chillier following widespread reports of Chinese hackers penetrating US corporate and military networks, not to mention the disclosures of Edward Snowden, which showed just how much covert surveillance can be accomplished when governments secretly work with compliant telecom companies.

To be sure, these obstacles will not come as a surprise to Lenovo and its partners. The Chinese firm agreed to a higher-than-usual breakup fee in its deal with IBM, offering to pay 8-9% of the $2.3 billion purchase price if the deal doesn’t close. That’s more than twice the usual fee, according to Bloomberg, which reported that Lenovo hired lawyers to advise on a CFIUS review early in the process and is prepared to divest other sensitive business units if necessary.

US government lawyers are also surely gearing up for another deep dive into Lenovo’s business—CFIUS cleared the sale of IBM’s laptop business in 2005—paying close attention to any coordination between its operations and the Chinese government. What will they find?

  • Legend Group, which spun off Lenovo and still owns 32.45% of its shares, was funded by the government-backed Chinese Academy of Sciences; this government-run academy still indirectly controls a significant bloc of Lenovo shares through its holdings in Legend.
  • The spy agencies of the UK, US, Canada, New Zealand, and Australia have a common policy banning the use of Lenovo machines from their secure networks, according to the Australian Financial Review. The Australian Defense Department subsequently denied the report.

As Quartz has reported, it is somewhat odd that Huawei—with no documented ties to Beijing other than the fact that the founder was once in the Chinese military—has been the object of so much criticism from US spy agencies, while Lenovo, which is part-owned by the Chinese government, has received so little. But with two high-profile Lenovo deals on the docket, that may be about to change.

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