Data Centre

IBM-Lenovo server deal hits security snag

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IBM System X ServersNo deal is done until it’s done, and that’s beginning to look the case with China-based Lenovo Group LTD.’s$2.3 billion bid to buy IBM Corp.’s entry-level server unit. According to published reports, the two companies filed for an extension to give the U.S. government more time to review the national security implications of the deal.

Bloomberg is citing unnamed sources that the extension was filed with the Committee on Foreign Investment in the U.S., a joint review board comprised of military and intelligence agencies, which has more questions about the national security implications of the deal that would transfer technology assets consumed by the federal government to a foreign power.

Extensions are not uncommon, particularly in transactions involving the Chinese. And analysts predicted the IBM-Lenovo deal would receive extra scrutiny because of U.S. suspicions that China technology companies place intelligence-gathering tools in U.S.-bound products.

The Lenovo purchase of the server unit is of interest to the U.S. government because IBM is a major supplier of servers and other hardware equipment to federal agencies, including military and intelligence. Lenovo is not allowed to sell its personal computers to several U.S. agencies, including the State Department. Several other nations have similar restrictions on Lenovo product purchases.

Last summer, the Australian Financial Review revealed that defense and intelligence agencies in Australia, U.S., U.K., Canada, and New Zealand have been specifically barred – in writing —  from buying any Lenovo products for use in secure networks. That edict came in 2006 after a  laboratory test and audit by British intelligence analysts claimed to have found back doors built into the Lenovo devices that could allow remote access and surveillance.

The publication also reported that a Chinese government agency, The Chinese Academy of Sciences, owns 38 percent of Legend Holdings, a holding company that owns 34 percent of Lenovo Group and is the vendor’s largest shareholder.

The server deal is of critical importance to IBM and Lenovo, for different reasons.

After months of speculation that it was trying to offload its x86 servers, IBM announced the deal with Lenovo. The deal looks a lot like the 2005 sale of IBM’s ThinkPad PC division, in which the core product was transferred to Lenovo and IBM hung in the background providing technical and logistical support.

The ThinkPad deal was the catalyst that propelled Lenovo to the global PC stage, from which it eventually became today’s market leader. Lenovo has servers in its portfolio, but its server business doesn’t register on the global market share numbers. By acquiring IBM’s server unit, Lenovo will become the third or fourth largest server vendor in the world.

For IBM, selling the entry-level server unit – which includes System x, BladeCenter, Flex System blade servers and switches, NeXtScale, iDataPlex and associated software, blade networking and maintenance operations – is a means to an ends. The unit is seeing sales and profitability shrink, dragging IBM’s financial performance indicators.

By divesting, IBM will have more resources to focus on the development of its cloud business, which it sees, in part, as a replacement for the System x servers. IBM’s goal is to grow its cloud business from $2.5 billion last year to $7 billion by 2015.

The pending deal has been reverberating through the channel since its announcement. IBM partners are re-examining their plans amid the potential of being transferred to the Lenovo channel program. Hewlett-Packard is luring away affected IBM partners with promises of access to a broader array of products and better support than they’ll get with Lenovo. And Lenovo and its partners are salivating over the prospects of getting their hands on servers with broader marketability.

The added review comes as U.S. and China tensions increase over spying and cyber-espionage. The U.S. has accused other Chinese companies, such as Huawei and ZTE, of being conduits for intelligence gathering. In the wake of the Edward Snowden leaks that implicate the U.S. in similar activities, China is re-examining its technology acquisitions from the U.S. IBM hardware sales have been falling since the Snowden revelations.

How long the national security review will take and what impact it will have on the eventual deal closing remains undetermined. The acquisition, announced in January, was not expected to close until the latter half of 2014.

This article originally appeared on Channelnomics.