A summer full of negative news for Sino-foreign trade relations got a rare piece of positive news over the weekend, with word that the US has approved the sale of IBM's (NYSE:IBM) low-end server business to Chinese PC giant Lenovo (OTCPK:LNVGY). The case looks a bit like another deal between the pair of tech giants nearly a decade ago, when IBM agreed to sell its high-profile PC business to Lenovo, only to see the deal run into political headwinds before finally getting approved by Washington. But this latest approval is slightly different, as it comes against a backdrop of heightened trade and other national security tensions between China and the west, especially from the US.
Both Lenovo and IBM have been saying publicly for months that they expected to get approval for the deal by year-end from the Committee on Foreign Investment in the United States (CFIUS), the Washington regulator that reviews all cross-border transactions for national security concerns. The 2 companies announced their landmark deal back in January, which would see Lenovo buy IBM's low-end x86 server business for $2.3 billion.
According to IBM's latest statement, CFIUS has formally completed its review of the deal and made no objections based on national security concerns. IBM called the clearance "good news" for both sides, and said they now look forward to closing the transaction, without giving any timetable. The CFIUS review was one of the last remaining major obstacles to completing the deal, meaning we could now see the sale close in the next few weeks.
Washington's decision to approve the deal is consistent with its other recent actions involving major cross border M&A between the US and China. Two other major recent deals both got similar clearance, despite much louder objections from local politicians. One of those saw Canada agree to allow the purchase of local energy giant Nexen to CNOOC (HKEx: 883; NYSE: CEO) for $15 billion, which raised concerns both in Canada and the US before both countries ultimately approved the sale. The other deal saw Chinese meat processor WH Group (HKEx: 288), formerly known as Shuanghui, ultimately cleared last year to pay $5 billion for Smithfield, the largest US maker of pork products.
The latest IBM-Lenovo server deal differed slightly from those other 2 deals because it involved companies from the tech sector. In this case, the business being purchased by Lenovo involves low-end computer servers, the devices used to host websites and other software that power the Internet. Washington had previously barred Chinese telecom giants Huawei and ZTE (HKEx: 763; Shenzhen: 000063) from selling their networking equipment to US telcos, saying it might contain hidden backdoors for spying by Beijing.
On a much broader basis, this latest IBM-Lenovo deal also comes against the backdrop of heightened trade frictions between the west and Beijing. Those frictions have led to a series of trade wars in the solar panel and several others sectors, with western governments most often complaining that China provides many of its companies with unfair state support. Most recently a growing number of foreign companies operating in China have also come under investigation by Beijing regulators for allegedly engaging in anti-competitive practices.
All of that said, the bigger question becomes: What's the broader significance, if any, of this new decision by Washington? The answer seems to be that Washington is signaling it will continue to clear major M&A by Chinese firms, and approval of this deal will probably soon be followed by a green light for another pending purchase by Lenovo of faded cellphone maker Motorola Mobility. The IBM deal's approval also sends an important signal to Beijing that Washington is more broadly committed to free trade despite disagreements in other areas, and for that reason could help to ease the heightened trade frictions.
Bottom line: Washington's approval for Lenovo's purchase of IBM's x86 server business will be followed by a similar green light for its Motorola buy, and could help to ease US-China trade tensions.
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