Definitions

The difference between bounded and unbounded intervention lies largely in degree, intensity, and intent. With unbounded intervention, the intent of the government in question is to block a deal through whatever means are necessary. Further, the government believes such action is necessary to resolve its concern over relative power positions, regardless of whether it is economic nationalism or geopolitical factors that have motivated that concern. However, when the government believes the circumstances of a particular deal make it possible to resolve its concerns through a more limited form of intervention, it will often take the opportunity to exhibit restraint by using the bounded alternative instead. This is because bounded intervention is even less likely to produce antagonism in the general relationship between the states involved.

With bounded intervention, the state employs a restricted (and hence “bounded”) strategy, the intent of which is simply to modify a cross-border deal in its favor, rather than to block it in its entirety. In other words, the state's intent is to allow the cross-border deal to occur, but in a modified form, which it has shaped. The means of modifying, or “mitigating,” a deal naturally varies in accordance with concerns raised by the host government of the target company (state A). So, too, will the level of bounded intervention that the government feels it is necessary to employ. This section seeks to differentiate between the two levels of bounded intervention: high and low. It also identifies some of the methods governments have at their disposal to “mitigate” the negative effects of a deal in the interest of state security, as that state defines it, though the list of possible government concerns and solutions is theoretically endless.

A hypothetical example will elucidate the basic difference between high- and low-bounded interventions. Let us assume that state A is concerned by the inclusion of a certain corporate division in a cross-border transaction – perhaps because it retains government contracts, is the primary manufacturer of a significant piece of military technology, or plays an important role in the military-industrial complex of that state. There are a number of ways that state A might handle this concern, depending on the sensitivity of the technology involved, the nature of the government contracts, and the degree of concern that these factors raise vis-à-vis national security.

If state A is exceptionally worried about the implications of the inclusion of this corporate division in the transaction, as well as the intentions and reliability of the company and/or country involved in the takeover, it might choose a high level of bounded intervention. High-bounded intervention entails the imposition of severe or exceedingly restrictive changes on the transaction in question, and may even require unique measures. For instance, state A might pursue a formal arrangement by which the division in question remains entirely run and controlled by nationals of state A, allowing only the revenue of that division to go to the acquiring company in state B. Alternatively, state A might go so far as to request that the division be excluded entirely from the sale of the domestic company.

The government of state A may, however, choose to engage in a low level of bounded intervention if it feels that severe measures are unnecessary to protect its national security. Low-bounded intervention entails simpler, less intrusive actions, which are not necessarily unique to the deal in question. For instance, in the hypothetical transaction under discussion, state A might feel that it is an adequate solution to simply require the acquiring company to respect its export control laws, and not pass on the technology involved in the deal to countries it deems “unfriendly.” Alternatively, if the acquiring company comes from a country that is a close ally and economic partner of state A, it may have already signed a comprehensive security agreement as the result of high-bounded intervention in a previous transaction. In that case, state A may simply rely on that previous agreement to resolve its concerns, necessitating only a low level of intervention in the current transaction.

A real-life example of this latter type of case would be when the UK's BAE Systems purchased America's United Defense Industries (UDI) in 2005. BAE Systems has purchased a number of US companies in the past through its US subsidiary BAE Systems North America. The US government had, in previous deals, asked BAE Systems North America to sign a comprehensive set of security agreements. Thus, one industry analyst has pointed out that when the BAE/UDI takeover occurred, only minimal intervention was required on the part of the US government because, even though UDI was a major government supplier with sensitive technology, the earlier agreements signed by BAE would allay the majority of the security concerns inherent in the UDI transaction.

No matter what level of bounded intervention a state chooses to employ, it will usually ensure that the modifications it makes to a deal are made legally binding upon the companies involved. In other words, the contracting parties (the acquiring and target companies) will be asked to sign a legal document (or series of documents) enumerating the ways in which the government has chosen to mitigate the negative effects of the deal, and confirming the contracting parties’ willingness to be bound by those modifications and requirements. In the US, for example, the government is unlikely to be satisfied with such agreements unless it “believes that the risks it identifies can be managed” successfully through deal modifications and assurances agreed to by the acquiring company (Graham & Marchick Reference Graham and Marchick2006, 71–2). Indeed, in any country, in order to be satisfied with this more restricted form of intervention, the government must be confident that the changes made to the deal will effectively protect its national security and, in some cases, its economic position, if that state believes economic security to be tied to national security.

In summary, bounded intervention is a restricted type of intervention used as a form of non-military internal balancing, where the goal is once again to protect or maximize the economic and/or military power of the state, without damaging the greater meta-relationship between the states involved. Such intervention allows cross-border M&A activity to continue, while preventing foreign governments – through the market actions of companies that they may either wholly control or later gain influence over – from gaining access to sensitive technology or information, or from gaining control of resources, materials, and networks, that could eventually help to alter the economic and/or military power balance.

Different States, Different Means…

The exact method and means through which a bounded intervention is executed varies by country. For example, the level of institutionalization of the procedures for intervention, the tools available for intervention, and the formality of the agreements negotiated between the government and the companies in question can differ substantially depending on the country involved. Before moving to the case studies, it is therefore important for comparison to examine how bounded intervention is effected in four different countries – the US, China, Russia, and the UK – both during the case studies and at the time of writing. A brief overview is also provided of the overarching foreign takeover regimes in these countries (with the exception of the US, whose regime was comprehensively examined in Chapter 3, pp. 110–11), in order to place these different approaches to bounded intervention in context.

Motivations for Bounded Intervention

As with unbounded intervention, bounded intervention tends to be motivated by economic nationalism and/or geopolitical competition. The findings in Chapter 2 indicate that the relative importance of these factors varies depending on the subset of cases under examination (Figure 29).

Generally, the variable associated with a significant increase in the likelihood of bounded intervention across all cases (MNLM I) is nationalism. As suggested previously, this finding might indicate that higher levels of economic nationalism in state A could also lead a state to protect its national interests through such measures. The analysis of the case studies that follow should help to demonstrate the accuracy of the assumption that economic nationalism is likely to play at least some role in a government's decision to employ bounded intervention.

When the population of cases was reduced to those that took place within the security community context (MNLM II), the significance of those factors representing geopolitical competition became apparent. As noted earlier, the probability of high-bounded intervention significantly increases when state A has higher levels of nationalism, resource dependency, and relative power.³¹ Interestingly, relative military power is shown to be significant in the negative direction, which may indicate that under certain conditions state A might feel more comfortable imposing modifications to foreign takeovers when it is in an advantaged power position versus state B. Put simply, state A may not feel that it is necessary to use unbounded intervention to solve its security concerns when conditions allow for a solution to those problems through a more restricted form of intervention, which in turn helps to minimize political fallout from its actions. As will be demonstrated in the examination of the Lenovo case, this may remain true even when the acquiring state is a rising power.

In the subset of cases that occurred outside of the security community context (MNLM III), geopolitical factors again show their importance alongside nationalism. The statistical results show that low-bounded intervention was significantly more likely when state A had high levels of nationalism and inward FDI. The fact that IFDI is an indicator of the relative economic power positions of states A and B demonstrates that the concern over the relative geopolitical position of those states plays an important role in determining how state A will handle a foreign takeover that hails from outside of its security community. The results also show that high-bounded intervention was more probable in this subset of cases when state A had high levels of nationalism and relative military power. Military power is again significant in the negative direction, for reasons already explained.

It is evident that nationalism and geopolitical competition increase the likelihood of the restricted form of intervention identified here as “bounded intervention.” As nationalism is used as a proxy for economic nationalism in the quantitative testing, the case studies that follow provide another opportunity to demonstrate the validity of this assumption and the importance of the role played by economic nationalism. The case studies also help to further refine our understanding of the role played by geopolitical competition in motivating this type of intervention. They focus on high-bounded intervention cases, which provide both a tougher test of the hypotheses and a greater opportunity to study the dynamics behind them in detail. Low-bounded interventions, such as those discussed earlier, do not provide the same opportunity to highlight these dynamics due to their more “routine” nature, as states are usually addressing more minor national security issues in such instances.

Furthermore, the case studies in this chapter elucidate the general conditions under which a state might feel more comfortable engaging in bounded, rather than unbounded, intervention. Bounded intervention is more common than unbounded intervention, with the former representing 29%, and the latter only 8%, of the total cases in the database. This may be because allowing foreign takeovers to be completed in modified form is even less likely than unbounded intervention to disrupt trade relationships or produce antagonism between the countries involved. In other words, it best accomplishes the goal of non-military internal balancing: to balance power without necessarily disrupting the greater meta-relationship at stake between the two countries.

The Context

Before delving into the Alcatel/Lucent case, it is important to understand where it stands in the context of the broader M&A market. This particular case involves a French company acquiring a US company in the telecommunications equipment manufacturing industry, which is part of the larger technology sector. Within the parameters of the database created for this investigation, sixty-eight US companies were targeted for foreign acquisition, and only seven of these deals occurred within this particular industry (see Figure 30). Of those, only one involved an acquirer from a country that the Correlates of War project does not classify as a member of the same security community as the US,³² and that country was Sweden, which – though not a member of NATO – remains a very close NATO partner with significant economic, political, and cultural ties. This suggests that in the US, a foreign takeover in this industry is usually more likely to see successful completion when the acquiring company hails from a state with a close relationship to Washington.

Furthermore, of those seven cases, the US engaged in some form of intervention in almost every one: bounded intervention in five cases, unbounded intervention in one case, and no intervention in only one case. Significantly, there are indications that the US government would likely have engaged in some form of intervention in the latter instance if the proposed bid had not been dropped before it was formally announced. The suggestion here is that even among allies, this sector is considered so strategically important that deals must at the very least be mitigated in order to ensure the protection of technology related to national security.

The Alcatel/Lucent merger is also the only instance in the dataset in which a French company even tried to buy a US company in this particular industry. In fact, in the dataset as a whole, there are only fifteen cases of a French company buying a foreign company in one of the target countries being examined here, and only five of those cases involved the purchase of a US company. Four of these five cases occurred in the technology sector as a whole, but only the Alcatel/Lucent deal involved the telecommunications hardware industry. This indicates that while takeovers in this subset of the technology sector have been rare, French takeovers of US companies in the technology sector as a whole are not. Figure 30 shows that French takeovers in the rest of the sector met with little resistance, highlighting the need to explain intervention in this case.

Significance

Beyond this market context, a number of factors make the Alcatel/Lucent merger a critical case. First, it is one of the most severe examples of high-bounded intervention. This is because the US government employed a mitigating tool now known as an “evergreen clause,” giving it the ability to reverse the merger at a future date if it becomes dissatisfied with the new entity's adherence to the security agreement it signed as part of the review process. As the first known case in which such a method has ever been used, most market and research analysts consider it critical for understanding the nature of such intervention.

Second, this is also one of the clearest cases of bounded intervention available for study. Detailed knowledge of such cases is quite rare, because the mitigating measures taken by governments are usually classified. Thus, even when we know alterations are made to a deal, we normally only hear the details of those measures if they are voluntarily released by the companies or are leaked to the press. The wealth of information in this case is, therefore, important to study.

Finally, the case is critical to this investigation because it provides a better understanding of the role of bounded intervention within security communities. To understand how, it is necessary to momentarily return to a discussion of the statistical context illustrated in Figure 30. Out of the six attempts by US companies to buy French companies in any sector in the database, only one was successful. This reflects the high level of economic nationalism in France generally, and the geopolitical antagonism toward foreign takeovers by US companies in particular – as illustrated by the infamous PepsiCo/Danone case examined in Chapter 3. Conversely, the Alcatel/Lucent case is the only instance in recent history in which the US intervened when a French company tried to purchase a US technology company. As will be discussed, this is partly because of the timing of the Alcatel/Lucent deal, which came immediately on the heels of the DPW debacle and shortly after the CNOOC case, ensuring that economic nationalism would play a small but important role in the reaction of the US government. Yet, as will be shown, intervention was also triggered by geopolitical concerns. Indeed, the Alcatel/Lucent case is the only one in which a French company targeted a US company that was involved in classified government work and contracts, heightening the geopolitical implications of the deal for the US.

The case is thus critical because it helps to highlight something that the statistical investigation in Chapter 2 could not: that although economic nationalism will tend to play a significant role in cases of bounded intervention within security communities, such an alliance relationship does not necessarily preclude an important role for geopolitical concerns. In the PepsiCo/Danone case, French fear of US hegemony almost mandated such a foreign takeover be blocked. In this case, the US had less to “fear” from France, but France's desire to score a geopolitical coup against the US, its determination at the time to cast the US in a bad diplomatic light, and its disregard for certain US sanctions regimes ensured that the political tensions between the two countries would exacerbate the national security concerns raised by the sensitive nature of Lucent's work.

The Story

On March 24, 2006, rumors of a merger between Alcatel SA of France and Lucent Technologies of the US hit the newswires (Zephyr 2006b). The two companies had discussed a possible merger in 2001, but those talks had failed “over how much control [Alcatel] would have” of a new combined entity (Frost Reference Frost2006). “Since then, however, Alcatel ha[d] grown faster than Lucent, giving it a clear upper hand in merger talks” (Frost Reference Frost2006). Additionally, the sporadic bankruptcy rumors Lucent had faced in 2001 and 2002, as well as the periodic cutbacks and profit warnings it had suffered, made a merger with Alcatel now seem much more appealing (see McKay Reference McKay2006a; Morse Reference Morse2006).

Both Alcatel and Lucent were telecommunications equipment manufacturers in the technology sector.³³ Yet, while the majority of their business focused on the private sector, each company held defense contracts with its respective government, and each had divisions dedicated to the development of sensitive technology. Alcatel, for example, owned a stake in two satellite-manufacturing JVs, Alcatel Alenia Space and Telespazio, with Italy's Finmeccanica. Alcatel Alenia worked on sensitive projects such as the first iteration (Giove-A) of the Galileo Satellite (see Alcatel 2006b). Lucent, meanwhile, held a number of contracts with the US DOD that ranged from providing it with “classified technology” to supplying “telecoms equipment for the Iraqi reconstruction project” (MacMillan Reference MacMillan2006). Lucent also owned and operated Bell Laboratories, an entity that for eighty years had conducted classified work for the US government: producing the transistor, the laser, and the touch-tone phone, while pioneering solar cells, cell phones, and the communications satellite (Alcatel-Lucent Reference Alcatel-Lucent2008; Reuters 2006a). Such pedigrees indicated that any deal between Alcatel and Lucent would raise national security concerns for both the US and France.

Not surprisingly, many analysts who felt the deal might make sense economically remained wary that its security implications could lead to failure if not addressed early, adequately, and carefully (see e.g., AFP 2006c; McKay Reference McKay2006b; Morse Reference Morse2006; Wickham Reference Wickham2006). Others believed that, even then, the deal might be blocked (see e.g., MacMillan Reference MacMillan2006). Thus, while it remained only a rumor, analysts had already begun to contemplate the different ways the deal might be mitigated in order to satisfy both Washington and Paris. The most common suggestions and commentary assumed that, at the bare minimum, France would encourage Alcatel to sell its satellite divisions to another French company, such as Thales, and Lucent would need to protect Bell Labs by either divesting it, or creating a subsidiary that would be closed off from foreign influence (see e.g., Butler Reference Butler and Michelson2006; Dow Jones 2006c; McKay Reference McKay2006a; Morse Reference Morse2006). These hurdles were not low, but many market and industry observers believed that, if they were executed well, the merger would not be blocked unless it became “a political football” like the DPW deal (MacMillan Reference MacMillan2006). Indeed, it was unlikely that France would completely block a deal that was largely in its favor, and that was viewed as a triumph for the French tech industry.³⁴ In the end, the lack of French cooperation geopolitically, combined with the need to protect classified materials and the rising protectionist sentiment in the US at that particular time, ensured the US government would at least intervene in a bounded fashion; and extreme politicization of the deal could have resulted in unbounded intervention.

By April 2, 2006, a definitive merger agreement was reached between the two companies valued at US $13.4 billion, giving Alcatel shareholders a 60% stake of the new combined entity and Lucent shareholders 40% (Zephyr 2006b). Because concerns over equality had quashed attempts by the two companies to merge in 2001, a clear effort was made to sell this as a “merger of equals” (MacMillan Reference MacMillan2006). Hence, it was announced immediately that Lucent's CEO Patricia Russo would head the new combined company, and in return its headquarters would remain in Paris, its CFO would come from Alcatel, its COO from Lucent, and the new board of directors would be equally drawn from Alcatel and Lucent's existing board members (AFX 2006a). Yet, despite these overt efforts toward equal partnership, the market generally viewed and treated the deal as a foreign takeover of a US company by a French one (Intereview 2008b). Lucent was clearly the “junior partner” in the merger, and even M&A databases such as Zephyr classify the deal as an acquisition of Lucent by Alcatel (MacMillan Reference MacMillan2006; Morse Reference Morse2006; Zephyr 2006b). Thus, while the details of the French position will still be discussed, Lucent will be treated as the target company for the purpose of this investigation.

Unlike most of the cases examined in the previous two chapters, Alcatel and Lucent sought to address the national security implications of their proposed deal before it was even officially announced.³⁵ In France, Alcatel sought early on to push through a previously discussed arrangement whereby the French defense electronics company Thales would take Alcatel's stake in its satellite JVs in return for a stake in Thales (see TelecomWeb 2006c). This deal would both calm France's worries about sensitive technology being seen by foreign citizens and help the government protect the vulnerable French Thales from a takeover by the European EADS (see Dow Jones 2006d; Financial Times 2006a; TelecomWeb 2006c). In the US, Lucent issued a press release when the proposed merger was announced in order to calm fears over the future security of Bell Labs. The release stated that “the combined company [would] form a separate, independent US subsidiary under Bell Labs…to perform research and development work for the US government that is of a sensitive nature,” and that Bell Labs would not be moved or its leadership changed (Lucent 2006). Lucent also announced it “ha[d] asked three experienced and distinguished members of the national security community to serve on the independent subsidiary's board,…subject to US government approval,” namely former Secretary of Defense William Perry, former NSA Director Lieutenant General Kenneth Minihan, and former Director of Central Intelligence James Woolsey (Lucent 2006). These actions were meant to “black box” Bell Labs from foreign control and influence, allowing only the revenue from its activities to go to the new entity. Such special subsidiaries can alleviate national security concerns, allowing governments, that wish to do so, to mitigate foreign takeovers without having to block them outright. By announcing their willingness to create such a subsidiary early on, Alcatel and Lucent were trying to anticipate the problems their deal might face, and cast their intentions in a positive light. It was likely hoped this would alleviate existing geopolitical tensions between the two countries in order to prevent the kind of unbounded intervention that had been so recently faced by DPW and CNOOC in the US. The companies then “submitted a voluntary notice of the merger to CFIUS in August 2006” (Alcatel 2006a), and were reported to have worked (and cooperated) closely with that same body in order to resolve the US government's concerns (Dow Jones 2006e).

In order to properly understand the US reaction to the Alcatel/Lucent merger, it is necessary to examine the political context in the US at that time. This deal surfaced just after the heavily politicized DPW case, which unleashed a furor of congressional rhetoric about the threat foreign takeovers could potentially pose to national and economic security. Both economic nationalism and national security awareness were therefore abnormally heightened by this time, and were being manifested in a rush of legislation proposed to reform CFIUS and make the foreign takeover review process more stringent.

Not surprisingly, Congressman Duncan Hunter (R-CA), who had been vociferously against the DPW deal, came out early on against the Alcatel/Lucent deal (see AFX 2006b). In a letter to President Bush dated April 28, 2006, Hunter stated:

Both companies responded directly to Hunter's concerns, reiterating the precautions they had already announced regarding the future of Bell Labs. Yet, it was clear that Hunter no longer believed CFIUS to be an effective review body and was voicing his concerns in order to make CFIUS more accountable.

Another issue raised by Hunter, which the companies, interestingly, did not immediately address, was the fact that the merger “could result in transfers of sensitive technologies or information to several countries with which Alcatel has dealings, including [Myanmar], China, Cuba, Iran, North Korea, Sudan, and Syria” (Inside US Trade 2006a). This is significant for the discussion of geopolitical tensions that follows, because though the US and France are part of the same security community, long-standing tensions over French disrespect for US-led sanctions regimes proved difficult to overcome, making it highly likely the US government would intervene in some way in this case in order to protect the technology involved.

Despite these concerns, Congressman Hunter was largely alone in his desire to block the deal. In other words, his rallying cry for unbounded intervention was not answered in this case, because the French position as a formal ally made bounded intervention both more desirable for the US and more creditable within the international community. Unlike the Check Point/Sourcefire deal, it seemed possible that mitigation could satisfactorily address the geopolitical and security issues raised by this deal, because the critical technology concerned did not represent all of Lucent's business. Hence, it was reported that Hunter's message did not “resonat[e] with many other members of congress” and was not echoed by them (Inside US Trade 2006a). Indeed, “one private sector source” made it clear that Hunter's actions were an attempt “to politicize the CFIUS process,” but “doubted [his actions] would impact a presidential decision on the CFIUS recommendation” regarding this deal “or on the broader debate over how to reform the CFIUS process” in general (Inside US Trade 2006b).³⁶

By mid-September 2006, the Alcatel/Lucent deal had received most of the necessary regulatory approvals. The deal was approved by the boards of directors of both Alcatel and Lucent on April 2, and by the shareholders of both companies on September 7 (Zephyr 2006b). The merger also received anti-trust approval from the US Department of Justice on June 8, and competition clearance from the European Commission on July 24 (Johnson Reference Johnson2006; Zephyr 2006b).

It is clear, however, that the heightened protectionist sentiment post-DPW/P&O, the one-off factor of the CFIUS reform debate that DPW and CNOOC had triggered, and geopolitical tensions with France, did contribute to a more rigorous investigation of the Alcatel/Lucent deal within CFIUS. On October 6, it surfaced that CFIUS would engage in the formal forty-five-day investigation (in addition to the normal thirty-day review) of the proposed merger. In fact, Clay Lowery, the Treasury Assistant Secretary for International Affairs, later testified before Congress in regards to the Alcatel/Lucent review that “CFIUS conducted one of the most rigorous and thorough investigations ever on a transaction before the committee” (Dow Jones 2006e).

These factors motivated the US government to engage in one of the most severe cases of bounded intervention in its history. It was announced on November 14 that CFIUS had concluded its review of the proposed merger, and on November 17 that President Bush had accepted CFIUS’ recommendation to approve the deal, which by then included numerous mitigating changes requested by CFIUS and agreed to by both companies. It is likely that the proactive stance taken by both Alcatel and Lucent toward the mitigation of the US government's national security concerns helped them to navigate this process successfully, as did the fact that “CFIUS ha[d] been in contact with the companies even before the…formal security review process began” (Dow Jones 2006e). By November 30, 2006, the merger was officially completed, and the entity Alcatel-Lucent opened for business under its new moniker the next day.

Yet, it is important to understand that while this deal seemed to the general public to go through without a hitch, the US government actually did engage in one of the clearest and intense examples of bounded intervention of which the details are publically known. For, in addition to the proposed provisions made by the two companies regarding Bell Labs, which were adopted in the final agreement, the US government required Alcatel and Lucent to “enter into two robust and far-reaching agreements designed to ensure the protection of [US] national security”: a “National Security Agreement and a Special Security Agreement” (TR Daily 2006). Though the exact details of these agreements are classified, it is assumed by the market that they covered the provisions made for the protection of Bell Labs and other classified work and contracts held by Lucent.

Furthermore, it was later confirmed that these agreements contained the evergreen clause mentioned earlier, allowing the US government to call for a reversal of the merger at any future date if it felt that the agreements were not being properly implemented. According to private-sector sources, such a clause had never been used before in the US, and many viewed it as highly detrimental because it might prohibit future FDI (Interview 2007). Thus, on December 5, 2006, the Business Roundtable, the Financial Services Forum, the Organization for International Investment, and the US Chamber of Commerce wrote to then Secretary of the Treasury Henry Paulson to “express concern over [the] so-called ‘evergreen’…condition…attached to CFIUS’ approval of the Alcatel/Lucent merger” (Inside US Trade 2006c). They pointed out that the serious nature of the inclusion of the evergreen clause lay in the fact that

The text of their letter shows both how rare and how severe the nature of this particular bounded intervention was. For, it was apparent that the government did not intend to block the merger, i.e., did not intend to engage in unbounded intervention. However, it is also clear why this was a case of high-bounded intervention in the dataset, for this is the closest a country can come to blocking a deal without actually doing so. The investigation of the variables that follows shows that national security concerns combined with geopolitical tensions and economic nationalism to result in this outcome.

Geopolitical Competition

The overall US–French geopolitical relationship had not significantly altered since the PepsiCo/Danone case in 2005, though in the Alcatel/ Lucent case the target company was American. France and the US remained part of the same security community, yet geopolitical tensions still existed between the two major powers. The US, of course, did not view France as a threat in the same overarching manner that France viewed US hegemonic power. However, France's stated desire to compete with the US for strategic power within the international system would necessitate that the US could not necessarily trust France in the same way it might other allies. Indeed, the French government remained opposed to the US stance on Iraq and Iran, and continued to do business with countries on which the US had imposed explicit export control regulations or strict sanctions regimes.

This deal therefore had very different geopolitical implications for France and the US. For the French, this takeover was seen as a great achievement for French economic power. Yet, because fears of American hegemony remained, the French government was careful to take steps that would protect its sensitive technology “from prying American eyes” (TelecomWeb 2006c). French President Jacques Chirac thus became personally involved in the deal, with the French government eventually backing a sale of Alcatel's satellite divisions to Thales, as already mentioned.³⁷

For the US, the geopolitical implications of the deal had a tri-fold effect on government intervention. First, the geopolitical relationship between the US and France ensured that the deal would not be blocked outright, but rather that it would be mitigated if necessary. The US had no need to intervene in an unbounded fashion that would arouse French anger unnecessarily, and that would be likely to cause a resurgence in the tensions that had only just begun to ease. Given the sector and the countries involved, it is fairly obvious that US resource dependency did not play a role in this deal.³⁸ As the clearly more powerful country in terms of military and economic might,³⁹ the US also did not need to react to this case in the way that France had reacted to Pepsi's bid for Danone. Furthermore, there was a desire not to engage in the same kind of overt protectionist rhetoric or unbounded intervention for which France was so well known. For, if unbounded intervention had been used in this case, it would undoubtedly have caused the French (albeit somewhat ironically) to use their soft power to denounce the US as a protectionist country on the world stage, which was an unwelcome possibility following the wealth of such statements that had flowed in the wake of DPW and CNOOC. Hence, the Administration's statement that President Bush's decision in favor of the deal “demonstrates the commitment of the United States to protect its national security interests and maintain its openness to investment, including investment from overseas which is vital to continued economic growth, job creation, and an ever-stronger nation” (Silva Reference Silva2006b). Also, the US still hoped at this point to obtain French assistance on such diplomatic fronts as the nuclear situation with Iran (see Wendlandt Reference Wendlandt2006). For such reasons, the market foresaw that there would be problems with the deal because of US–French politics, but there was a general belief that such problems could be overcome through the type of mitigation classified here as “bounded intervention” (Morse Reference Morse2006).

Second, France's stated desire to enhance its geopolitical position vis-à-vis the US ensured that mitigation would be necessary. French geopolitical and economic aspirations, as well as its previous truculence toward the US on the world diplomatic stage, necessitated (at the very least) the rigorous protection of national security-related technology through measures such as the national security agreement and special security agreement that were eventually implemented as part of the deal. If unbounded intervention was not a seemly option for the US in this case, it was clear that bounded intervention of some form would be necessary. Furthermore, it was clear that France was engaging in similar mitigating measures in order to protect its satellite technology from the US through the sale of the Alcatel Alenia and Telespazio JVs. Hence, Congressman Hunter argued in his letter to President Bush that “the United States government must be able to protect its national security interests in at least the same manner as the French government” (Inside US Trade 2006a). On this particular point, at least, the rest of the US government seemed to agree with Hunter.

Finally, the French position of doing business with countries from which the US most wanted to protect its vital technology contributed to the severity of the mitigating measures that were eventually imposed. The need to ensure the security of the highly sensitive technology conducted at Bell Labs and involved in the government contracts held by Lucent would by necessity make the US mitigation procedures rigorous. Yet, given the outcome of the CFIUS review process and the implementation of the evergreen clause in the security agreements concluded between Alcatel/Lucent and the US government, it is clear that at least one of the other issues Congressman Hunter raised publicly was echoed confidentially within the CFIUS review process. This, of course, was the concern that the merger might “result in transfers of sensitive technologies or information to several countries with which Alcatel has dealings, including [Myanmar], China, Cuba, Iran, North Korea, Sudan, and Syria” (Inside US Trade 2006a). Indeed, upon the merger's completion, the new Alcatel-Lucent CEO Patricia Russo, a US citizen, announced, “I am forbidden by law from being involved in business in Iran…Clearly we have to respect US laws” that say “US citizens cannot participate in business done in US-sanctioned countries” (Optical Networks Daily 2006; Wendlandt Reference Wendlandt2006). The timing of her announcement implies that this was an issue raised within the CFIUS process. It was also followed by speculation, which was likely accurate, that the possibility of Alcatel-Lucent continuing to do business with Iran after the merger may have prompted CFIUS to include the evergreen clause that would allow the US to unwind the merger in the future (see e.g., Wendlandt Reference Wendlandt2006). Professor Antonia Chayes later commented that “if Alcatel were to actively pursue business with Iran it could create tensions between the US and France at a time when the US is trying to bring France into supporting sanctions against Iran” (Wendlandt Reference Wendlandt2006). Thus, tensions with France and the French position on Iran motivated the US to intervene in this case in order to protect its technology and national security. At the same time, however, the US desire to gain French cooperation on the Iranian issue and ease tension with its French ally ensured such intervention would be bounded rather than unbounded.

Economic Nationalism

Though economic nationalism had been relatively low in the recent history of the US, economic nationalism and national security awareness were abnormally heightened in 2006 in the wake of CNOOC's attempted acquisition of Unocal and the row over DPW. As already mentioned, this was highlighted by the large number of legislative and regulatory proposals put forward at that time both to reform CFIUS and to make the foreign takeover review process it oversees more stringent. US nationalism was, as usual, fairly high in 2006, at 71% (WVS 2001–04), and pro-globalization sentiment, while still above the median value among the fifty-four surveyed countries, was at the lowest level since its peak in 2002 (see IMD 2007b).⁴⁰ Rising protectionist sentiment was also clearly recognized in the US at the time (AFP 2006c), and some analysts feared that the deal “could yet fall afoul of political obstacles at [such] a time of heightened protectionism” (Frost Reference Frost2006).

Furthermore, though Bell Labs, within Lucent, was not officially labeled or discussed within the national discourse as a national champion per se, it would certainly qualify as one because of the integral role its technology has played in the making of America as a superpower. It has provided some of the innovations in military, surveillance, and communications technology seen as vital to the protection, projection, and augmentation of that power's national capabilities. Thus, though the US has not traditionally supported companies as national champions, it is clear that the special role of Bell Labs in the American power structure helped to ensure that its work would be protected by the government from an unconditional foreign takeover, and that the deal would need to be altered to accommodate this fact.

Nevertheless, the transaction did not see the same kind of virulent reaction as did the DPW deal. This was largely because the Alcatel/Lucent deal was not heavily politicized, helping to stem the forces of economic nationalism that may have been present at the time. Only one member of the legislature, Congressman Hunter, was deeply opposed to the deal, and his true concern seemed to be the safety of the technology produced by Bell Labs and the possibility it would be sold on to unfriendly regimes, rather than opposition to the sale of the company as a complete economic entity. Furthermore, complete agreement existed in the market that these concerns and Hunter's activities would not be strong enough to block the deal as a whole (see AFP 2006c).

Thus, the real role of economic nationalism in this case was more indirect: its presence forced CFIUS to review the case more thoroughly than any other in US history (Dow Jones 2006e), and in this way it may have contributed to the decision to impose stricter mitigation measures than ever before in the form of the evergreen clause.

Interest Group Presence

Though a small number of interest groups opposed the Alcatel/Lucent deal, their pressure did not play an important or decisive role in prompting government intervention in this case. In part, this was because these groups were unconcerned with either geopolitics or the protection of a national champion, but instead opposed the deal on the grounds that those they represented would not be making enough of a profit. In France, “Proxinvest, a shareholder-rights consultant to leading French institutional investors,…advised [its] clients to vote against the…merger” on the basis that Alcatel was overpaying for Lucent (Matlack Reference Matlack2006). Meanwhile, in the US, “some Lucent shareholders…pursu[ed] a class-action lawsuit contending just the opposite – that they will get too little from the merger” (Matlack Reference Matlack2006). Significantly, this minority shareholder group's attempt to get a court order to postpone the shareholder vote was unsuccessful, and Institutional Shareholder Services, a powerful corporate governance/proxy voting services firm that provides research and recommendations on such deals, came out in support of this one (Les Echoes 2006). In the end, the shareholders of both Alcatel and Lucent approved the merger, as did the boards of both companies (Zephyr 2006b). Most importantly, at no time did any of these interest groups suggest that the US government should intervene in the deal in any way.

The only group that even suggested the deal “raises national security issues and should be referred to…CFIUS” was the “US Business and Industry Council lobbying group” (Jane's Defence Weekly 2006). Yet, this was also the same group that later came out against the inclusion of the evergreen clause in the security agreements that Alcatel and Lucent eventually signed with the US government. Thus, while it is apparent that this particular group may have desired some form of bounded intervention if it was deemed necessary for national security purposes, it certainly did not desire it on such a scale. Furthermore, in hindsight, it is clear that the Council's position was taken long after both companies were already in consultation with CFIUS because of the early recognition that some form of mitigation would be necessary for the protection of national security and the satisfaction of the geopolitical concerns already mentioned. It can be concluded that this particular lobbying group did not play a role in motivating government intervention in this case either.

Finally, the labor unions in both the US and France did not play a role in US government intervention on this occasion. It is true that the French labor unions were “upset” by Alcatel's plans “to do away with a 23 year-old practice of having employee representatives on its board” once the merger was completed (Gauthier-Villars Reference Gauthier-Villars2006). Yet, this did not ultimately end up being an issue, and opposition quickly died down in France. Though heavy job losses were expected as a result of the merger (McLean Reference McLean2006), it did not result in heavy union opposition. This is partly because the cuts were expected to take place in the US rather than France. If the scenario were reversed, union opposition would have been much more likely (see Sage Reference Sage2006). Though labor groups and employees in the US were aware that most of the job cuts would take place in their country, they seemed more concerned over the fate of “health benefits and pensions” (McKay Reference McKay2006c), and did not attempt to prompt the type of bounded government intervention that eventually occurred.

Competition Concerns

Anti-trust competition concerns also did not turn out to be an issue in this case. The EU Commission announced its approval of the “proposed transaction” on the basis that it “[would] not significantly impede effective competition” (EU Commission 2006a). This was because the companies, though “engaged in similar activities,” were sufficiently “focused on different regions” (AFP 2006b). The US Department of Justice also “granted antitrust approval” to the deal on the basis that it did not raise any significant competition concerns (Johnson Reference Johnson2006).

Conclusions on Alcatel/Lucent

The preceding discussion of the variables illustrates that in the Alcatel/ Lucent case, both geopolitical competition concerns and economic nationalism played a role in motivating bounded government intervention, and that the former factor played a more direct role than the latter. It has also been shown that competition concerns and interest group pressure did not play a significant role in motivating government intervention in this case.

Thus, the US was not intervening solely for reasons of heightened economic nationalism at that particular point in time, but because of geopolitical concerns that were exacerbated by the sensitive nature of Lucent's work. This fact shows the importance of both variables, highlighting a behavior that can be lost in MNLM I, where most cases of bounded intervention are associated with economic nationalism, and geopolitical concerns only near significance. The case supports the findings in MNLM II, which show that geopolitical factors can play a significant role in increasing the likelihood of bounded intervention within security communities, as can economic nationalism. Critically, this case demonstrates that even within security communities, geopolitical competition considerations can be of equal or greater importance compared to economic nationalism in motivating bounded intervention.

The Context

The next case examines Lenovo Group Ltd.'s takeover of the International Business Machine (IBM) Corporation's PC business in 2005. Lenovo is a Chinese company whose majority stockholder is Legend Holdings Ltd., a holding company owned and controlled by the Chinese government. IBM, of course, is the pioneer of the original personal computer, and, in 2005, retained its position as the primary supplier of computers to the US government.

This case is critical for two reasons. First, the Lenovo/IBM takeover is an excellent example of an extremely rare case type. Chinese acquisitions of this size, and in the national security industries examined here, have only been attempted twice in the US between September 11, 2001 and May 15, 2007.⁴¹ The first instance was the CNOOC/Unocal case of unbounded intervention examined in Chapter 3, the second the Lenovo/IBM transaction. Such cases have largely been viewed as threatening in the US, because the government of the rising Chinese power has openly stated its desire to use the market to gain power, influence, and technology for military and civilian use.

This case is also critical for testing the primary and secondary hypotheses, as it helps explain why two cross-border acquisitions between similar countries, and under seemingly similar conditions, might lead to dissimilar outcomes. For, while the CNOOC/Unocal case resulted in unbounded intervention and no deal, the Lenovo case only led to bounded intervention and a mitigated deal. Yet, both cases occurred in the same year (2005), and were therefore subject to the same general level of geopolitical tension and economic nationalism. How, then, can the different outcomes be explained within the context of the primary and secondary hypotheses?

The answer is that, while geopolitical concerns were once again the primary, and economic nationalism the secondary, motivation for intervention in a case that occurred outside of the context of a security community, specific elements of the case helped to ameliorate those variables in a way that ensured intervention would only take the form of bounded intervention. In other words, this case is critical because it enables us to examine the hypothesis in a way that strict statistical data testing cannot. The results of the multinomial logit function performed in Chapter 2 only confirmed that the presence of geopolitical competition and economic nationalism makes both bounded and unbounded intervention more likely than no intervention at all. This case study, however, in conjunction with the CNOOC case, can help us to understand why a government might choose one of these forms of intervention over the other.

The Story

On December 7, 2004, it was announced that Lenovo would acquire 100% of IBM's PC Division for a total consideration of $1.75 billion.⁴² It seemed that despite “Big Blue's” traditional role as the flagship of US computer technology, the PC division had become its least profitable business, with its software development and consulting services divisions providing much higher margins. IBM was thus looking for a buyer for the division, and welcomed Lenovo's bid (see Hachman Reference Hachman2004). As will be discussed, no competition concerns were expected and the deal received an early termination of its anti-trust review from the Federal Trade Commission on January 7, 2005 (Spooner Reference Spooner2005a). Similarly, there was no real interest group movement against this deal. Shareholders were eventually won over, and US labor groups were largely unconcerned as it was clear that no real job losses would result from the takeover.

However, it was obvious early on that the deal would need CFIUS approval. This was both because of the industry involved, and because the majority shareholder in Lenovo was, and remains, the Chinese government, which owned 57% of Lenovo's stock through a government-owned and controlled holding company called Legend Group Holdings (Bilodeau & Kennedy Reference Bilodeau2005; Ramstad Reference Ramstad2004). As a result, the companies “formally filed a notice seeking CFIUS clearance on December 29, [2004]” (Bilodeau & Kennedy Reference Bilodeau2005).

By January 24, 2005, the first report surfaced of concerns emerging within CFIUS on national security grounds in a widely read and cited Bloomberg article (see Bilodeau & Kennedy Reference Bilodeau2005). This article cited anonymous sources saying that “members of [CFIUS], including the Justice Department and Department of Homeland Security, [were] worr[ied] that Chinese operatives might use an IBM facility in North Carolina to engage in industrial espionage, using stolen technologies for military purposes” (Bilodeau & Kennedy Reference Bilodeau2005).

On the following day, three congressmen sent a letter to CFIUS urging it to conduct a more rigorous forty-five-day review of the deal because of national security concerns (Orol Reference Orol2005e). They were three fairly powerful congressmen, whose input was likely be take into consideration by CFIUS: Duncan Hunter, Chairman of the House Armed Services Committee, Henry Hyde (R-IL), Chairman of the House International Relations Committee, and Donald Manzullo (R-IL), Chairman of the House Small Business Committee (Orol Reference Orol2005e). Only Rep. Manzullo seemed to be truly motivated by what could be identified as economic nationalism. He feared the deal might provide China with control over the PC industry, or that China might be using “unfair” government subsidies in order to help Lenovo purchase IBM. As will be discussed further, however, the congressmen were primarily focused on the geopolitical concern that sensitive or dual-use technology might be transferred to a non-allied state, which could then apply it to military use. Given the Chinese government's own stated intent to use foreign takeovers for this purpose,⁴³ and its control over Lenovo, the idea was not far-fetched.

Despite this, the market was still somewhat surprised on January 27 when CFIUS extended its review to the further, and more intensive, forty-five-day investigation (see Moody Reference Moody2005). For, while some analysts had expected the deal to result in stark unbounded intervention (see e.g., MPR 2005; WSJ 2005b), others truly believed that any security concerns could be dealt with in the initial thirty-day review (see Bilodeau & Kennedy Reference Bilodeau2005). This was because, though the PC business did involve some “high tech” aspects, and was once at the forefront of technology in the US, it was now considered to be relatively “low tech,” in addition to “low margin,” by some market analysts (see e.g., Blustein & Musgrove Reference Blustein2005; Sinocast Reference Sinocast2005b). As will be discussed, however, the more optimistic analysts were not really thinking of the dual-use military applications of some of that technology, nor did they realize how seriously the US government seemed to take the Chinese espionage issue. IBM's PC business was located in Triangle Park, NC, where other IBM research and development projects were being carried out for the US government.

In the end, the government was able to work out a solution to these national security concerns with the cooperation of the companies involved. On March 9, 2005, IBM announced that the takeover “was cleared by the US government” at the end of the forty-five-day extended review (Moody Reference Moody2005). It was reported that “Lenovo overcame US concerns that the Chinese government would use Lenovo's PCs and the US facilities for espionage” so successfully that CFIUS eventually agreed to “give the deal its unanimous consent” (Auchard Reference Auchard2005a; Moody Reference Moody2005). The deal was officially completed on May 2, 2005. Though many of the exact details of the alterations made to the deal for national security reasons remain confidential, both the government and the companies publicly acknowledged such measures were put in place. Furthermore, the changes that were announced or leaked to the press, as discussed later, highlight the credence given to geopolitical concerns over espionage and technology transfers to non-allied states.

The investigation of the variables demonstrates that, as with the CNOOC/Unocal case, intervention in the Lenovo bid was primarily motivated by geopolitical competition concerns, and secondarily by economic nationalism. In other words, the presence of these factors made some form of intervention more likely than no intervention at all. In this case, however, the result was bounded rather than unbounded intervention because the specific aspects of the deal afforded the government the option to choose mitigation over an outright block, which was a more diplomatic solution to the protection of national security, and a more favorable one given the US’ preference for open and engaged economic relations with China.

Interest Group Presence

No real interest groups were pressing for government intervention in this case. Though some of Lenovo's shareholders originally came out against the takeover, their concerns were soon overcome and they approved the deal on January 28 (Datamonitor 2005). Significantly, however, Lenovo's shareholders were worried that the deal would be blocked by the US government, or that a new combined entity might face difficulty in successfully combining the very different cultures of the two companies (ComputerWire 2005). In no way did they desire the US government to intervene, because it was clear that a successful deal would be to their benefit.

Labor groups were not incensed by the deal because the companies made announcements very early in the process that “no layoffs [we]re planned” and, furthermore, that “the deal w[ould] have a minimal effect on employment, benefits or compensation” (Cox Reference Cox2004). This news seemed highly effective in quelling the initial fears of both IBM's and Lenovo's workers (Witte Reference Witte2004; see also McMillan Reference McMillan2005).

One interest group did mobilize in favor of the deal: IBM. The company “hired consultants to help secure approval from CFIUS,” one of whom was “Brent Scowcroft, the former national-security adviser to President George H. W. Bush and Gerald Ford” (Bilodeau Reference Bilodeau2005). It was also reported that IBM hired

These individuals were highly respected within the government and had an intimate understanding of the CFIUS process. Marchick, for example, wrote one of the only books on US government intervention into cross-border M&A on national security grounds, with Edward Graham. Though it is unknown what their exact brief from IBM entailed, it is generally thought that they were hired to help IBM and Lenovo navigate the CFIUS process successfully. Given the consultants hired, their expertise, and their current and former government positions, it is likely that the companies were advised on what mitigatory measures might be necessary to gain approval, rather than how to achieve the more unlikely “no intervention” outcome, as these individuals would also have been highly concerned with the preservation of national security in this case. In other words, they were likely hired to help the companies successfully navigate the process and achieve a bounded intervention outcome, rather than an unbounded intervention outcome, and it is fairly unlikely that they were pushing for no intervention. It is also important to note that they were reported to be serving in an advisory, rather than a lobbying, capacity.

Thus, there were no real interest groups pushing for intervention in this case, or attempting to prevent the US government from pursuing bounded intervention.

Competition Concerns

Similarly, economic competition concerns did not seem to factor into the Lenovo/IBM case. By January 7, 2005, the Federal Trade Commission declared “that it ha[d] granted Lenovo and IBM an early-termination ruling under the Hart-Scott-Rodino antitrust act” (Spooner Reference Spooner2005a). It was possible for the decision to be made quickly because there was no apparent evidence that the takeover would create a monopoly or anti-competitive concentration within the personal computer, or broader technology, industry. Thus, it seems clear that this was not a factor motivating bounded intervention in this case.

Economic Nationalism

As discussed in the CNOOC and DPW cases, the US is not always associated with economic nationalism, though distinct pockets of such nationalism do exist within some parts of the US government and its institutions, as evidenced periodically in its history. Displays of economic nationalism in the US have historically been targeted and rare, and have often been caused by distinctive massive influxes of FDI from a particular country, such as Japan in the 1980s. Nationalism was relatively high in the US in 2005, providing a solid base for potential economic nationalism.⁴⁴ Yet, the Lenovo bid came at the very beginning of China's notable surge in overseas investment and cross-border M&A activity; it would not be until later the same year that Haier⁴⁵ and CNOOC would both attempt large-scale takeovers in the US. Though some evidence can be found of antipathy toward Chinese FDI at this point, it is not nearly as marked or widespread as it was by the time CNOOC had made its bid for Unocal.

As also mentioned in the CNOOC case, the US has not traditionally shown great support or protection for so-called “national champions,” and this attitude remained true in this case with IBM. Often called “Big Blue” in the media and press, IBM ostensibly makes a good candidate for a national champion. For decades, the company as a whole has stood at the forefront of the US technology sector, and it is viewed as “the original grand dame flagship of the industry” (Sullivan Reference Sullivan2004). Its large market share, and its relationship with many government agencies, has made it an American icon.

At the time, some commentators and analysts noted the importance and significance of such an iconic brand as IBM being “sold to China” – but they were not incensed by the possibility, and were clearly not advocating either for or against intervention in this case. Some did, for example, ask “how…America's top PC maker end[ed] up as nothing more than lunch for an Asian Tiger” (Sullivan Reference Sullivan2004). However, the focus was mainly on the fact that it was a momentous and historical deal, as it was “the first major Chinese acquisition of a Fortune 100 company,” and clearly “a harbinger of deals to come” (Bilodeau & Kennedy Reference Bilodeau2005; Sullivan Reference Sullivan2004). It seems that in the American psyche, “no brand is eternal” (Boston Herald 2004), an attitude that truly sums up the reluctance of the US government, and the public, to protect what would have been one of its national champions from a foreign takeover.

An icon does not necessarily translate into a national champion, and a single division of such an icon, even less so. It is important to reiterate here that IBM as a whole was not in danger of being taken over, only its “lower tech” PC division, and this was because IBM wanted to sell that part of the business, which had become a “drag on margins and profitability” (Hachman Reference Hachman2004; see also Blustein & Musgrove Reference Blustein2005). Market analysts were thus largely reported to believe that the White House's attempt to “foster cooperative economic ties with Beijing,” combined with IBM's need and desire to get out of an unprofitable business, likely meant “that in the end Washington will allow the IBM/Lenovo deal to go ahead” (Blustein & Musgrove Reference Blustein2005). Of course, such a view was based on the inherent assumption that the larger geopolitical and national security concerns could be overcome through some form of mitigated intervention.

Despite this general lack of support for IBM as a national champion, however, there is some evidence that members of Congress believed the deal should be blocked on grounds that might be identified as economic nationalism. In the letter that Congressmen Hunter, Hyde, and Manzullo sent to President Bush, they were evidently “concern[ed] that Lenovo [would] have an unfair competitive advantage over US computer makers because the People's Republic of China subsidizes the company” (Orol Reference Orol2005e). It should be noted, however, that Congressman Manzullo seemed to be the only one who was primarily motivated by such concerns. Certainly, Rep. Manzullo, known for “worr[ying] frequently about a…loss of US manufacturing jobs to China” (WSJ 2005b), was the only one to have publicly, and consistently, attempted to make an issue of the deal on these grounds. One of his representatives stated that Manzullo's concerns stemmed from a belief that “China gets a competitive advantage for many things because they are a nonmarket economy,” and that “by selling IBM's PC Business to China, it could corner the global market on computers” (Orol Reference Orol2005e). Such comments caused a sparse few, such as the China Business Strategy group (quoted here), to claim that the deal had met with resistance due to those “who oppose globalization and economic integration” (PZMN 2005). At the same time, “Manzullo insist[ed] that his campaign ‘[wa]s not protectionist’” because “his concerns might be unfounded, but he won't know unless Congress has more time to review the deal” (Kessler Reference Kessler2005). Despite this rather interesting logic, however, it is clear that Manzullo was mainly worried about the economic ramifications of the deal giving the Chinese undue control of, or advantage in, the PC market versus the US.

It also later surfaced that the US–China ESRC had sent a letter to Congressmen Hunter, Hyde, and Manzullo in which it advocated intervention in the deal. In the letter, the Commission reportedly

This statement demonstrates the Commission's opinion that economic security and national security are intertwined, a position that has itself been tightly linked with protectionism (see e.g., Graham & Marchick Reference Graham and Marchick2006). The Commission was clearly also concerned by the increasing level of Chinese FDI, and Lenovo's bid for IBM was a prime example of China's efforts to become a “global player.” In a later hearing, the US–China ESRC stated that because the “velocity and the size of those Chinese acquisitions [is] clearly on the rise,” it “hope[d]” that there would “be an increasing use of the CFIUS process” (US–China ESRC 2005). Unfortunately, it is unclear whether the Commission's letter was sent to the three congressmen before or after they sent their own letter to the President advocating a further CFIUS investigation.

It is clear, however, that some elements of economic nationalism were present in this case, and that these may have acted at least as a secondary motivation for government intervention. CFIUS would be unlikely to seek alterations to the Lenovo/IBM deal on economic nationalist grounds alone, as previously discussed in other cases. Yet, it does seem that the three congressmen's letter, which included Rep. Manzullo's economic fears, did help ensure a forty-five-day CFIUS investigation. This, in turn, made it more likely that bounded intervention would occur, as it provided greater focus on the national security concerns discussed in the next section, and provided the opportunity for the government to seek changes to the deal that would allay those concerns.

It is important to note that though there is evidence of economic nationalism in this case beginning to be directed against Chinese foreign investment, as will be shown, it had not yet reached the level that it would in the later CNOOC case, when Chinese investment came to be viewed as more threatening to US economic security. It should be remembered, however, that even in the CNOOC case, more traditional geopolitical and national security concerns overshadowed those of economic security when it came to decisions regarding intervention. As discussed in detail in the section on that case, instances of unbounded intervention into the Chinese purchase of a US company have always entailed a heavy presence of traditional national and military security concerns, whether or not economic nationalism was present. The next section, on geopolitical competition, illustrates that the Lenovo/IBM case resulted only in bounded intervention because it was possible to mitigate such national security concerns, whereas this was not possible in the cases that resulted in unbounded intervention.

Geopolitical Competition

The level of geopolitical competition between China and the US was basically the same in this case as it was in the CNOOC case of the same year. In 2005, as today, China and the US were geopolitical strategic rivals with a highly complex relationship. China was positioned as a major power, with rising relative power in both the economic and military realms. This fact, combined with a widespread US government belief that China posed a potential future military threat, ensured that the intent of Chinese actions would be carefully examined. Disagreement over the status of Taiwan, worries over increasing Chinese military spending and their quest for natural resources, on top of the economic disputes over the valuation of the yuan and intellectual property rights, created constant tension between the countries at the very time that the Bush Administration was attempting to engage China diplomatically and economically. It was not surprising, therefore, that “while US officials such as [Treasury Secretary] Snow [had] called for closer ties between the two countries to foster trade, lawmakers such as Republican Senator James Inhofe of Oklahoma [had] raised objections to embracing China for security reasons” in 2005 (Bilodeau & Kennedy Reference Bilodeau2005). The Chinese government's intent to use cross-border acquisitions to increase its economic, and even military, power generally only intensified such fears.⁴⁶ With this in mind, the following discussion focuses on the specific geopolitical concerns that affected the Lenovo/IBM case. For a more detailed description of the general geopolitical relationship between China and the US in 2005, see the CNOOC/Unocal case in Chapter 3.

It should also be noted here that certain aspects of the geopolitical competition between the two countries led to a dissimilar outcome in the Lenovo and CNOOC cases, because of differences in the industries involved. The level of US dependence on oil and China's desire for ever-greater control over its own natural resource supply affected the type of intervention sought by the US government in the CNOOC case to a much greater degree than it did in the Lenovo one. In the CNOOC case, the target was an oil company with proprietary dual-use technology. The likelihood of unbounded intervention was heightened because the purchase of Unocal by CNOOC would have meant complete control over a resource that was the focus of competition and contention, even if the deal could have been altered to prevent the transfer of the dual-use technology. Bounded intervention would not really have solved all of the national security concerns involved in that case. In the Lenovo case, however, it was possible, as will be shown, to effectively mitigate the deal in a manner that assuaged the national security concerns it raised. As the control over the PC business as a whole did not (in and of itself) pose a threat, and no resource was at risk, bounded intervention was a viable solution to the problem.

What were the national security concerns that were raised and intensified in this case by the level of geopolitical competition between the US and China?

The first concern that emerged was over the possibility that the Chinese government would use the facilities purchased in the takeover as a base for conducting both international and industrial espionage (see e.g., Bilodeau Reference Bilodeau2005; Bilodeau & Kennedy Reference Bilodeau2005; Blustein & Musgrove Reference Blustein2005; Orol Reference Orol2005a, Reference Orol2005b; Spooner Reference Spooner2005b; Tsuruoka Reference Tsuruoka2005).⁴⁷ IBM's PC facilities were largely located in the industrial compound of Triangle Park, NC, where it had also stationed a number of its other business divisions. These included some IBM research and development facilities that do work “specifically” for the US DOD, making the security of these projects, and the park as a whole, of special concern to CFIUS (Orol Reference Orol2005b). It was reported that “CFIUS…decided on January 27th to begin [the forty-five-day] formal investigation over concerns that the Chinese government will use Lenovo-made PCs and the company's new US facilities for espionage” (Bilodeau Reference Bilodeau2005). The same fear was voiced by Michael R. Wessel of the US government-sponsored US–China ESRC, who told the media that he had discussed this concern with the relevant government officials (see Blustein & Musgrove Reference Blustein2005). Well into the forty-five-day review, the issue seemed to remain at the forefront of the US government fears regarding the takeover. For, in late February, it was reported that the US DHS and Justice Department, both of which are represented in CFIUS, were still “question[ing] whether Chinese operatives could use the facility [in Triangle Park]…to engage in industrial espionage” (Bilodeau Reference Bilodeau2005).

The espionage issue seems to have been the primary focus of discussions between CFIUS, IBM, and Lenovo over possible mitigatory measures that could be taken to make the deal viable. It also appears that negotiations began long before the formal review process. They intensified when “agents from the US Secret Service and the Federal Bureau of Investigation inspected the Research Triangle site” in early February, leading IBM to “[offer] to take measures such as closing its buildings in the office park to access by Lenovo employees” (Bilodeau Reference Bilodeau2005). IBM apparently “balked at other demands,” and “in a proposal that CFIUS considered [on February 23], the company refused to agree not to transfer any employees involved in research and development to the Research Triangle site and objected to some security measures, such as installing new safety doors” (Bilodeau Reference Bilodeau2005).

The concern over espionage was compounded by the fact that the Chinese government holding company that controlled Lenovo (Legend Group Holdings) had links to the Chinese military and the Chinese Academy of the Sciences. In fact, Legend Group “was established in 1984 by the Chinese Academy of Sciences, a government institution” that “plays a key role in exploiting technologies in China” (Bilodeau & Kennedy Reference Bilodeau2005; Tsuruoka Reference Tsuruoka2005). Not surprisingly, this fact fanned “the fear [that] Lenovo might transfer sensitive technology it develops with IBM to China's military” (Tsuruoka Reference Tsuruoka2005).

This argument ties in with the second concern: that Lenovo, and by extension the Chinese government, would be gaining access to dual-use technology that could be deployed for military purposes. The dual-use issue was among those raised early on by Mr. Wessel of the US–China ESCRC (WSJ 2005b) and William Triplett, a former member of the Senate Foreign Relations Committee (Tsuruoka Reference Tsuruoka2005). This was because some of the PC components being developed by IBM at the time, such as super long-life batteries, could potentially have “military applications in the field” (Orol Reference Orol2005a). Some observers also worried that IBM's microprocessor technology could be applied for use in missiles (Orol Reference Orol2005a). Adam Segal of the Council on Foreign Relations summed it up well when he pointed out that the CFIUS investigation was “symptomatic” of the fact that “as China develops its more competitive civilian sector, there are pretty large concerns in the United States…about civilian technology bleeding over to the military side” (Tsuruoka Reference Tsuruoka2005).

A third concern was that China would re-export dual-use technology to countries that were unfriendly to the US, such as Iran, given China's past history of flouting US export control laws (see e.g., Tsuruoka Reference Tsuruoka2005; Rash Reference Rash2005). One of the aspects of the Sino-US geopolitical context at the time that intensified national security concerns over the transfer of sensitive technology to China, beyond its position as a strategic rival to the US, was China's poor record of adhering to US export control laws. In January of 2005, the tension over this issue was heightened when the US government “imposed penalties” on eight “of China's largest companies” for exporting technology that would assist “Iran's efforts to improve its ballistic missiles” (Sanger Reference Sanger2005).

Finally, there may also have been a fear that the Chinese government and/or military might use the Lenovo acquisition to gain backdoor access to US government computers. IBM provided PCs to a number of government agencies. Yet, China was at the time “blacklisted” (along with Iran, Iraq, and North Korea) by the US Trade Agreements Act (TAA), meaning that the US government was not supposed to use Chinese suppliers (Aitoro Reference Aitoro2005).⁴⁸ Many analysts believed that the issue of supply would be easily obviated, because it was likely that the PCs would still be assembled in the US, or ignored. The worry over the security of that supply, however, remained. Mr. Wessel, again, pointed out that

Thus, there was likely also concern that the Chinese government could arrange backdoor access to computers provided to the US government by Lenovo.

Eventually, a number of measures were agreed upon between CFIUS and the two companies as part of the US government's strategy of bounded intervention to alleviate the national security concerns rooted in the geopolitical tension between the US and China at this time. In order “to win federal approval…Lenovo employees working at IBM's manufacturing and design facility in Raleigh, NC, [had to] be housed in a separate building on campus” (CMP TechWeb 2005). By March 9, it was revealed that the “staff working in the Research Triangle Park, North Carolina, area w[ould] be relocated to a central facility that [was] sold by IBM to Lenovo and is located in the same industrial park” (Auchard Reference Auchard2005a). This modification to the deal was obviously intended to protect the security of the IBM government R&D projects at the park, and to prevent opportunities for espionage. Though a number of modifications were apparently made to the deal as a result of government intervention, these changes are among the few that were made public by the companies.

Overall, neither IBM nor Lenovo appeared upset at the mitigation measures required by the government, likely because they were fairly reasonable and simple given the concerns voiced. In fact, the new CEO of Lenovo, Mr. Ward, told reporters that “everything that CFIUS asked of us was perfectly reasonable” (Auchard Reference Auchard2005a). Thus, bounded intervention was an option in this case because it was possible for mitigation to alleviate the national security concerns without losing the cooperation of the companies involved, and without having to block the deal as a whole.

Conclusions on Lenovo/IBM

The discussion of the variables in the Lenovo/IBM case clearly shows that geopolitical competition was the primary, and economic nationalism the secondary, motivation for bounded intervention in this case, resulting in a changed deal. Once again, interest group pressure and economic competition concerns did not play an active role in guiding government intervention. This result is in line with the primary hypothesis, and with our expectations as a result of the statistical findings from Chapter 2. In other words, given the presence of economic nationalism and geopolitical competition in a case that took place outside of a security community context, we expected to see some form of intervention, either bounded or unbounded, rather than its absence.

The preceding examination of the variables also helps us to understand something that the statistics did not: why we saw bounded intervention into the Lenovo takeover, when the ostensibly similar CNOOC case resulted in unbounded intervention. The result of the Lenovo/IBM takeover differed from that of the CNOOC/Unocal one because, in the latter instance, bounded intervention would have not been as successful an option for the government. The issue there was that Chinese control over Unocal in and of itself became associated with the struggle for control over resources, and politicization of the deal made it difficult for bounded intervention to appear to be enough to alleviate fears that the Chinese company's intent was nefarious. With Lenovo, it was possible to mitigate national security concerns in a way that could not be accomplished in the CNOOC case. In the Lenovo case, the company being purchased was relatively “low tech” for a “high tech” industry, it was losing money rapidly, IBM wanted to exit the business, and there was a viable government strategy for protecting the technology that was deemed to be at risk of espionage in other parts of the company. Control over resource access was not at stake, and it was possible to solve the national security concerns posed by the deal without having to block the deal as a whole. In other words, bounded intervention in the form of mitigation strategies is likely to occur when the circumstance of the deal make it a viable option for the government to pursue, without jeopardizing its security. Few states would want to employ unbounded intervention unless it was considered absolutely necessary, because, though unbounded intervention will not damage the relationship between two countries in the same way other balancing techniques might, bounded intervention is even less likely to create tension between states. This is because, though it is done on the basis of national security, it is pursued in a manner that is unlikely to negatively affect valuable trading relationships, and that is often seen as an amicable compromise to a difficult problem. It can also be a matter of timing, for after the US government's perceived need to block both the CNOOC/Unocal deal, as well as the Hutchinson Whampoa deal, there was likely an even greater desire to seek a compromise in this case, where compromise was possible, in order to ease fears of anti-FDI sentiment among Chinese and other foreign investors.