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IBM Corp. and China’s Lenovo Group Ltd. are negotiating with federal regulators to foreclose any national security concerns over their $1.7 billion deal, sources familiar with the matter said. The Committee on Foreign Investments in the U.S., a multiagency panel that reviews acquisitions of U.S. businesses by foreign companies, is expected to decide by Friday whether to launch a formal investigation into whether the IBM-Lenovo deal threatens national security. Government concerns, which were first reported on Sunday by the Bloomberg news agency, focus on IBM’s production facilities in North Carolina’s Research Triangle Park, a source said. The IBM unit focuses on improving the company’s PCs by, for example, improving their battery life, said Richard Petersen, an analyst with Portland, Ore.-based Pacific Crest Securities. It also conducts research to enhance the design, performance and speed of IBM’s microprocessors. Lenovo is majority owned by Legend Group Holdings Co., which is controlled by the Chinese government. “The result of this research may raise security risks,” the source said. Lenovo, which on Dec. 8 agreed to buy IBM’s personal computer business in what is the largest foreign acquisition by a Chinese company, applied for CFIUS review on Dec. 29, sources said. Committee officials have 30 days from that date to decide whether they will begin a formal 45-day investigation into the merger. CFIUS comprises 11 U.S. government agencies, and its members include the secretaries of state, homeland security, defense, and commerce; the U.S. attorney general; the director of the Office of Management and Budget; and the chairman of the Council of Economic Advisers. The secretary of the treasury chairs the committee. A source said CFIUS representatives for the departments of Defense and Homeland Security are worried that any deal concessions by Lenovo or IBM could be insufficient to alleviate national security concerns. By contrast, other panel members, including officials at the Commerce Department, argue that the transaction is vital to encourage international trade, sources said. IBM has filed the required legal notice with CFIUS, said IBM spokesman Edward Barbini, adding that the Armonk, N.Y., company is following standard procedure in securing federal clearance for the deal. Sources close to the companies said IBM and Lenovo officials presented their merger proposal to CFIUS officials weeks before announcing the deal. Andrew Lipman, a partner at law firm Swidler Berlin LLP in Washington, said CFIUS officials are likely concerned that Chinese officials could apply research gleaned from IBM’s PC microprocessor manufacturing operations to missile technology development. The Commerce Department’s Bureau of Industry and Security monitors products, including microprocessors, with national security implications. Lenovo, which is the largest PC maker in the People’s Republic of China, could try to assuage U.S. government concerns by agreeing to ensure that a majority of American citizens sit on its board, said Ronald Lee, a Washington-based partner at law firm Arnold & Porter LLP who handled CFIUS issues while at the Justice Department from 1998 to 2000. Lee also said the committee could have concerns that the Chinese government aims to use the IBM-Lenovo deal to establish a strategic location from which to conduct industrial espionage “You could imagine a situation where you set up a fish and bait store in the U.S. as a facility for conducting espionage,” Lee said. Copyright �2005 TDD, LLC. All rights reserved.

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