Le no-no

R.A. Hettinga rah at shipwright.com
Fri Jan 28 19:48:18 PST 2005


RED HERRING | The Business of Technology

Le no-no

The U.S. trips up a simple plan between IBM and Lenovo.
January 28, 2005

Homeland security is a cornerstone of the Bush Administration. But does
halting the IBM-Lenovo deal make the United States any safer? The Committee
on Foreign Investment in the United States (CFIUS) has decided to
investigate the threat presented by the sale of IBM's personal computer
business to China's Lenovo Group.

Industry observers want to know what it is about this deal that irks the
feds. "I don't know," says Jeff Moss, CEO of Black Hat, a computer security
consulting firm. "It could be the loss of any manufacturing technology, any
kind of proprietary technology that IBM had; but the Chinese could take a
laptop apart themselves, too."

Besides, most personal computers are already made in China-PC production is
extremely commoditized, perhaps as much as transistors. "It is quite a
stretch [to say] that the sale of the PC business to Lenovo would threaten
American security," says Baizu Chen, a professor at the University of
Southern California's Gordon S. Marshall School of Business. "Some senators
want to make a noise. Eventually, this will pass. It's just transfer of

One concern may have to do more with location than technology. The
Washington Post quoted a member of the U.S.-China Economic and Security
Review Commission-a Congressional panel created to watch commercial
relations between the U.S. and China-as saying that Chinese computer
experts could use an IBM facility in North Carolina as a base for
industrial espionage.

While the U.S. Treasury Department wouldn't confirm or deny the launch of
the 45-day probe, IBM, which will still hold an 18.9 percent stake in the
business, says it has filed the required notice with the committee and is
cooperating fully. The company is confident in the process and outcome. One
would hope so, given that the deal is worth $1.75 billion in cash, equity,
and assumed debt.

Where are the red flags? The U.S. government must demand action if a deal
impacts domestic production needed for projected national defense
requirements, or the capacity of domestic industries to meet national
defense requirements, or the control of domestic industries by foreign
citizens. The sale of IBM's money-losing PC unit doesn't quite cut it.

It could be an issue of pride, say some-or perhaps cryptographic chips, say
others. "Some of the IBM laptops have built-in cryptographic chips," says
Pete Lindstrom, research director for Spire Securities. Mr. Lindstrom
points out that if the intellectual property associated with cryptography
is sold to a foreign country, one could potentially transfer a strong
cryptographic capability to another country.

But IBM is a multinational company, with employees across the globe. Would
it really be so hard for someone to access such information? In the end, it
all comes down to whom you trust. Legend Holdings owns the majority stake
in Lenovo, and the Chinese government controls a large chunk of Legend. A
few years ago, Global Crossing wanted to sell its telecommunications
network to Hong Kong-based Hutchison Whampoa. It almost did-until the CFIUS
stepped in. But that's a story IBM executives would rather not think about.

R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

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