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Lenovo’s Deals with IBM and Google Likely to Survive CFIUS Review

The Chinese leading PC maker, Lenovo, has been ambitiously using acquisitions to fuel its growth since the beginning of this year. The company announced two deals valued at over $5 billion, total, in January, both with U.S. firms. On January 23, 2014, Lenovo entered into an agreement with IBM to acquire the latter’s x86 Server Business for about $2.3 billion, and within less than a week, it entered into another agreement with Google to buy the Motorola Mobility smartphone business, including over 2,000 patent assets, for approximately $2.91 billion. ((Press Release, Lenovo, Lenovo Plans to Acquire IBM’s x86 Server Business (Jan. 23, 2014), http://news.lenovo.com/article_display.cfm?article_id=1755; Press Release, Lenovo, Lenovo to Acquire Motorola Mobility from Google (Jan. 29, 2014), http://news.lenovo.com/article_display.cfm?article_id=1768.))

The success of these two transactions depends on regulatory review, however, and one of the major hurdles Lenovo is expected to face is clearing the review process by the Committee on Foreign Investment in the United States (commonly referred to as CFIUS, pronounced SIF-ee-us).

CFIUS is an inter-agency committee of the federal government that reviews the national security implications of foreign investments in the United States economy. ((The Committee on Foreign Investment in the United States (CFIUS), U.S. Dep’t of Treasury, http://www.treasury.gov/resource-center/international/Pages/Committee-on-Foreign-Investment-in-US.aspx (last visited Apr. 6, 2014).)) It was established by an executive order of President Gerald Ford in 1975. ((Exec. Order No. 11,858, 40 F.R. 20,263 (1975).)) It was a response to growing congressional concerns over a surge of investment by countries of Organization of the Petroleum Exporting Countries (OPEC) in U.S. Treasury and corporate securities back then. ((James K. Jackson, Cong. Research Serv., RL33388, The Committee on Foreign Investment in the United States (CFIUS) 1 (2013).)) Some senators were worried that much of the investments were motivated politically rather than economically. ((Id. (citing The Operations of Federal Agencies in Monitoring, Reporting on, and Analyzing Foreign Investments in the United States: Hearing Before the Subcomm. of the H. Comm. on Gov’t Operations, 96th Cong. 334-35 (1979) ).)) The current CFIUS process is set out under the title Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons. ((31 C.F.R. pt. 800 (2008).))

CFIUS reviews transactions that would result in a foreign person possessing control of a U.S. business, with certain exceptions. ((50 U.S.C. app. § 2170(a)(3) (2008); 31 C.F.R. §§ 800.301-.302 (2008).)) Such transactions are termed as “covered transactions.” To be specific, the term “covered transaction” covers merger, acquisition, and takeover. ((50 U.S.C. app. § 2170(a)(3) (2008).)) As a matter of law, CFIUS must review all covered transactions in order to determine whether such transactions would pose threats or result in damages to the national security of the United States. ((Id. § 2170(b). See also, Stephen Heifetz & Michael Gershberg, Why Are Foreign Investment in Domestic Energy Projects Now Under CFIUS Scrutiny?, 3 Harvard Bus. L. Rev. 203 (2013).)) It does not matter whether the transaction is closed or not.

The review can be initiated by parties to the transaction voluntarily, or by the President or CFIUS. CFIUS adopts a voluntary notification system, where a party or parties to a transaction, proposed or completed, could file a notice with CFIUS voluntarily. ((50 U.S.C. app. § 2170(b)(1)(C)(i), (b)(1)(D) (2008); 31 C.F.R. § 800.401 (2008).)) The statute allows 30 days for CFIUS to review the transaction in order to determine its potential effects on the national security. ((50 U.S.C. app. § 2170(b)(1)(A), (E) (2008).)) CFIUS may decide to commence an investigation within the 30-day period and reach a final determination within 45 days of the commencement. ((Id. § 2170(b)(2)(C).)) The parties will negotiate with the committee to have the deal approved, usually through the foreign person’s making concessions and promises so as to minimize the national security risks to the U.S. exposed by the transaction in question.

Since Lenovo is a Chinese company, its deals with IBM and Google are the typical covered transactions reviewed by CFIUS. In fact, Lenovo’s acquisition of IBM’s low-end server business has already raised national security worries, as the U.S. government and several major telecommunications companies are users of the servers at issue. ((David McLaughlin & Alex Barinka, Lenovo-IBM Deal Probed by U.S. Over Servers at Pentagon, Bloomberg (Apr. 4, 2014), http://www.bloomberg.com/news/2014-04-04/lenovo-ibm-deal-probed-by-u-s-over-servers-at-pentagon.html.)) In response, Lenovo pointed out that it would not have the access to those servers, since IBM will continue to be in charge of maintaining the equipment under a five-year agreement that could be extended. ((Id.))

In contrast, the Motorola deal has so far sparked fewer concerns than the IBM deal. ((Gina Chon & Ed Hammond, Lenovo Braced for Cfius Scrutiny over Motorola Handset Deal, FT.com (Feb. 2, 2014), http://www.ft.com/intl/cms/s/0/2e86ff60-8ad5-11e3-ba54-00144feab7de.html.)) The reasons are that the most sensitive patents will be still with Google, that Motorola’s business where government users are involved are part of another company, and that the deal involves hardware rather than software. ((Id.))

Some experts have predicted favorably that both deals will survive the regulatory scrutiny of CFIUS, as long as the parties work cooperatively with CFIUS. ((Diane Bartz, Experts Predict Lenovo’s U.S. Buys Will Pass Regulatory Muster, Reuters (Jan. 31, 2014), http://www.reuters.com/article/2014/01/31/us-motorolamobility-lenovo-regulation-idUSBREA0U06C20140131.)) Admittedly, Lenovo has obtained approval for each of its three deals with U.S. firms reviewed by CFIUS in the past, and it is not a state-owned enterprise. ((Id.; David McLaughlin & Alex Barinka, Lenovo-IBM Deal Probed by U.S. Over Servers at Pentagon, Bloomberg (Apr. 4, 2014) http://www.bloomberg.com/news/2014-04-04/lenovo-ibm-deal-probed-by-u-s-over-servers-at-pentagon.html.)) Nevertheless, neither factor will be dispositive in determining whether CFIUS will let the deals go through.