Lenovo’s Motorola Deal Likely to Face Intense Federal Scrutiny

Google’s surprise announcement that it plans to sell its Motorola handset business to Lenovo, the Chinese technology company, now puts the spotlight on whether federal officials will agree the deal poses no national security concerns.

Federal scrutiny of the deal is expected to be heightened because it involves the sale of telecommunications equipment assets to a company partially backed by the Chinese government. Similar deals have passed U.S. security reviews although not without some agreements by companies to modify them.

Google and Lenovo officials told reporters yesterday they’re confident the sale will pass regulatory review.

But one person close to the deal said it may not be easy because of the political atmosphere in Washington, where lawmakers and the administration have viewed Chinese investments in U.S. companies with suspicion.

“There’s been a feeling lately that Chinese companies are facing a higher scrutiny” from federal officials, said Amanda Forsythe, a D.C.-based lawyer at Chadbourne & Parke who specializes in national security deal reviews.

The administration signed off on the sale of Smithfield Foods to a Chinese company last year, for example, despite concerns raised in Congress about whether the deal could harm the security of the U.S. food supply.

But U.S. officials tend to more closely scrutinize the potential sale of Internet networks or telecommunications equipment than pork products because of concerns about intelligence gathering in the U.S. by foreign governments. The concern is heightened when the U.S. company being acquiring provides products or services to government agencies or involves the U.S.’s telecom infrastructure.

Lenovo now has two deals that must past a national-security review. The company’s recent deal to acquire IBM Corp.’s low-end server business is also expected to undergo a separate national security review.

That deal is also expected to get rigorous scrutiny by federal officials. As Bloomberg noted yesterday, Lenovo agreed to a larger-than-normal breakup fee to buy IBM’s low-end server business, partly over concerns that the deal might not past muster during the upcoming national-security review.

Sales of U.S. companies or assets to foreign investors that involve potential national security risks need approval of the Committee on Foreign Investment in the U.S., which is a group of U.S. government officials who screen such deals.

Headed by the Treasury Department, the low-profile committee is made up of officials from federal agencies, including the Department of Homeland Security and Justice Department. The Justice Department is also expected to do a routine review of the deal for any antitrust concerns, but that isn’t expected to be much of an issue in this case.

“Chinese companies also should be aware that the U.S. government often perceives significant national security risks in these deals, particularly when the deals relate to information and telecommunications technologies,” Stewart Baker, a partner at Steptoe & Johnson warned in a note earlier this month.

Last May, CFIUS signed off on Japanese firm SoftBank Corp.’s proposal to acquire Sprint Nextel Corp after the companies agreed to some conditions, including a requirement that Sprint’s Clearwire business unit agree to end a supply deal with Chinese telecommunications equipment giant Huawei Technologies Co.

In 2012, 39 of the 114 reviews by federal officials of proposed foreign acquisitions involved Chinese investors, the committee’s recent annual report to Congress showed.

“China surpassed the United Kingdom in 2012 as the source for the largest number of foreign investments undergoing national security reviews,” lawyers at Baker Hostetler noted earlier this week. “Perhaps not coincidentally, 2012 saw substantially more notices withdrawn than in previous years.”

Companies generally don’t wait for government agencies to deny their deals. If things are starting to look bad, they tend to withdraw them instead.

In 2012, President Obama took the unusual step of requiring a Chinese company to unwind a deal to purchase a U.S. company that owned a wind farm project near a U.S. naval facility in Oregon because of national security concerns.

“Lenovo being a Chinese company will inevitably lead to tighter scrutiny during (the CFIUS review) than other potential buyers of Motorola, said Paul Gallant, a policy analyst at Guggenheim Partners. “But in the end, I’d be surprised if this was a serious roadblock.”

This article originally appeared on Recode.net.