IBM's desire to sell PC business to Chinese firm increases pressure on government committee...

The Committee on Foreign Investment in the United States (CFIUS) has become more active in recent years, as foreign investment in U.S. technology companies has increased, according to Washington lawyers involved in CFIUS proceedings. Some government members of CFIUS are concerned about acquisitions

When the Singapore government and a company with links to the Chinese military decided to buy Global Crossing in 2003, which was in bankruptcy at the time, "it sparked a new aggressiveness" among CFIUS members, says one Washington trade lawyer who has represented foreign companies in CFIUS proceedings. Singapore Technologies Telemedia (STT) was partially owned by the Singapore government and was working with Hong Kong-based Hutchison Wampoa, which had ties to China. The deal collapsed.

IBM "is facing a similar CFIUS challenge," said the lawyer who asked not to be named due to the secretive nature of CFIUS.

The proposed sale of IBM's PC business to Chinese owned Lenovo for $1.25 billion is being investigated by CFIUS, according to news reports. The Chinese Academy of Sciences is considered to be a majority shareholder of Lenovo. The Chinese Academy directs the industrial policy for the entire country of China, according to Capitol Hill aides. "The IBM laptop brand is being sold to the Chinese Academy of Sciences, which is not motivated by profit and loss and normal issues that govern corporations," says one congressional aide.

Dell Computer has already had to exit the Chinese market due to its inability to compete with Lenovo, according CFIUS observers. Lenovo is able to undercut Dell because it sells computers in China without operating systems, knowing that users will install their own pirated versions along with applications software programs.

"We're enabling a formidable international competitor that is driven by a state industrial policy that will be able to dump PCs into every market in the world," says the Capitol Hill aide. "Have you taken a look at the divergence between IBM's lobbying campaign [to gain approval of the sale] and their advertising campaign?"

A recent IBM advertisement in the Wall Street Journal assured American IBM PC customers that the new owners will be dedicated to introducing leading-edge, innovative technology. "Then compare that to their [political] lobbying campaign where they refer to this as low-end commodity hardware," says the aide. "Hasn't anyone picked up on the forked tongue going on there?"

IBM has given CFIUS "a lot of work to do," says another Washington lawyer involved with international transactions. Last year's Defense Authorization bill included a provision that expanded the types of Chinese firms that were defined as being a "Communist Chinese military company." DOD is required to maintain a list of companies operating directly or indirectly in the United States that are owned or controlled by China's People's Liberation Army. But the PLA "has formally divested itself of all commercial interests," says the Defense Authorization bill (HR 4200). As a result, Congress directed DOD to include in its list Chinese firms "owned or operated by a government ministry of the People's Republic of China (PRC) or an entity affiliated with the PRC's defense industrial base, such as the China State Shipbuilding Corporation or the China Overseas Shipping Corporation," says a bill summary from the House Armed Services Committee. "This change recognizes a broader and different universe of government and commercial interests now engaged in China's military modernization," says the bill.

IBM is faced with a "quagmire" due to this new definition and the political nature of the deal, says the D.C. lawyer. Many past CFIUS cases were never politicized. But that's changed with the IBM/Lenovo deal. Three Republican committee chairmen in the House of Representatives--Duncan Hunter (Calif.) of the House Armed Services Committee, Henry Hyde (Ill.) of the International Relations Committee and Don Manzullo (Ill.) of the Small Business Committee--"want answers to these questions about control," he says. "They've raised the stakes for CFIUS. They don't want them blessing the deal without providing them with a good explanation as to why a Chinese company should be on the GSA schedule."