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Experts predict Lenovo's U.S. buys will pass regulatory muster

Lenovo's laptop PCs are displayed at an electronic shop in Tokyo September 5, 2012. REUTERS/Kim Kyung-Hoon
Lenovo's laptop PCs are displayed at an electronic shop in Tokyo September 5, 2012. REUTERS/Kim Kyung-Hoon

By Diane Bartz

WASHINGTON (Reuters) - U.S. officials are likely to allow China's Lenovo Group to buy IBM's low-end server business and Google Inc's Motorola Mobility handset business if it agrees to concessions aimed at protecting U.S. national security, experts said.

Computer maker Lenovo has advantages over other Chinese companies that should help it overcome the mutual suspicion between the United States and China over industrial spying and cybersecurity, such as its track record of successful U.S. acquisitions in the past. And importantly, it is not directly controlled by China's government.

Even so, it could be in for a battle over its latest deals with at least one lawmaker expressing concern.

Lenovo said on Wednesday it would acquire Motorola Mobility, along with some 2,000 patents, for $2.91 billion. That news came days after an announcement the company would purchase IBM's low-end server unit for $2.3 billion.

The deals will be reviewed by the inter-agency Committee on Foreign Investment in the United States, or CFIUS, to ensure they do not threaten national security.

"We look forward to going through the regulatory process and we're going to work with the regulators with an open and transparent approach," Lenovo spokesman Brion Tingler said.

Lenovo has been through the secretive CFIUS process three times before and has won approval each time, according to a source familiar with the process.

The first was in 2005, when Lenovo bought IBM's ThinkPad business in a deal that catapulted the company into the global technology big leagues. In that case CFIUS approval came to the dismay of Representative Frank Wolf, a Republican from Virginia and a tough critic of China.

Wolf said he discovered after that approval that the State Department had made plans to purchase Lenovo computers. "They were not able to cancel the purchases but made sure that none of them were used for anything," he said.

"I just think we have to be careful," said Wolf.

Lenovo also went through CFIUS reviews when it bought Stoneware Inc to expand cloud solutions and formed a strategic partnership with EMC Corporation. Both deals were announced in 2012.

It is not known what security concessions - if any - CFIUS wrung out of Lenovo in the previous transactions, but typical measures include having a security officer, a security plan or other steps aimed at preventing a foreign government from influencing a company in a way that would put U.S. security at risk, the expert said.

CFIUS may also require that only U.S. citizens handle certain products and services or demand that certain products be located only in the United States.

Lenovo has already been in touch with CFIUS about its latest U.S. deals, as is typical, said sources familiar with the process.

PATENTS IN FOCUS

A typical CFIUS analysis will touch on two sides - what threat may be posed by the foreign company involved and what vulnerabilities are exposed by the purchase, said Anne Salladin, a former Treasury official with CFIUS experience.

"I do think that both of these deals are likely candidates for mitigation measures," said Salladin, who is now at the law firm Stroock & Stroock & Lavan LLP.

Another former government official with CFIUS experience, Jonathan Gafni, said the review of the Motorola Mobility deal likely would not focus on handsets but on more complicated patents.

Lenovo will receive more than 2,000 "patent assets" as part of the transaction, the companies said, although it is not known which ones will change hands. Gafni said regulators would want to give them extra scrutiny.

"There are already a ton of Chinese handsets being sold in this country," said Gafni, now with Compass Point Analytics. "I think it could take some time to figure it all out, but I don't see a big problem here."

In the end, experts said, Lenovo was likely to win CFIUS approval.

"If there was a Chinese company that was well-positioned to see this deal come off, it's Lenovo," said Jim Lewis, a security expert with the think tank Center for Strategic and International Studies. "They've done the dance before and they know what the steps are."

CFIUS, which is headed by the Treasury Department, usually takes 30 days to review simple deals, but may take an additional 45 days on more complicated transactions.

Of the 23 transactions CFIUS reviewed in 2012, 10 were withdrawn and abandoned, according to the latest CFIUS annual report. One Chinese transaction was blocked in 2012 - the proposed purchase of an Oregon wind farm near a sensitive Navy installation.

(This story was corrected to fix spelling of law firm name to Stroock & Stroock & Lavan from Strook & Strook & Lavan in paragraph 16)

(Editing by Peter Cooney, Ros Krasny and Stephen Coates)

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