IT Mergers Have Feds Flailing Against Tech Globalization

The acquisition of a U.S. IT company doesn't need to involve the United Arab Emirates to put the U.S. government on edge. For Canada-based Nortel Networks to buy government contractor PEC Solutions last year, it had to set up a separate subsidiary with its own board of directors. The Defense Department can monitor E-mails at the subsidiary at its whim, to check if classified information is flowing north of the border.

U.S. defense and national security worries are running smack into the reality of how global the tech industry has become. But reality is no match for election-year politics. France-based Alcatel's proposed acquisition of Lucent Technologies was revealed last week and is the latest deal likely to face closer scrutiny in the wake of the failed move to hand over some U.S. port operations to UAE-owned Dubai Ports World.

	Foreign owners? Not for Hunter. Photo by Gerald Herbert/AP

The merger of the two telecom equipment makers will face U.S. lawmakers' scrutiny in part because Lucent owns Bell Labs, a hallowed place where both the laser and the transistor were born. There are strict government procedures for foreign-owned companies doing classified work, but that won't stop the chattering. Sen. Charles Schumer, D-N.Y., issued a statement, saying, "The Bell Labs are some of the premier research institutions in the country, and we should watch this proposed merger carefully." Yet, while Lucent still does sensitive, high-tech government work, including some reconstruction in Iraq and providing technology for wire tapping and call interception, its influence is a shadow of what it once was. "Bell Labs is much more a symbol than it is something that's actually strategic for the U.S.," Gartner analyst David Willis says.

It's not just the megadeals being watched. In March, Israeli network security provider Check Point Software Technologies scrapped a $225 million deal to acquire Sourcefire, a U.S. intrusion-prevention company, after intense scrutiny from the federal interagency Committee on Foreign Investment, which oversees sensitive international deals. Also, the U.S.-China Economic and Security Review Commission, appointed by Congress, called for a probe into a State Department contract with Chinese-owned Lenovo to supply 15,000 computers, even though they're for unclassified systems and are assembled largely in the United States and serviced by IBM.

Sound The Alarm

Concerns go beyond politicians. Last year, Pentagon advisers warned of an "alarming" migration of critical hardware manufacturing away from the United States, saying the shift jeopardizes "classified information embedded in chip designs," raises the potential for Trojan horses in chips that could disrupt military systems, and slows the pace of U.S. research and development.

Two congressional proposals aim to give the Committee on Foreign Investment in the United States more power over mergers, and a bill last month from Rep. Duncan Hunter, R-Calif., seeks to stop foreign companies from owning infrastructure or "systems" vital to national security. "Everybody in Congress is trying to out-tough each other," says Bill Reinsch, a former Commerce Department official who heads the pro-trade National Foreign Trade Council.

But IT's globalization ship has sailed, even if the U.S. government didn't wave goodbye. In last year's congressional review of IBM's sale of its PC business to Lenovo, engineers took apart a ThinkPad and an IBM desktop to show that most parts already were made in China. Every major U.S. tech company does substantial overseas development. And the Government Accountability Office recently found that programs as sensitive as advanced jet fighters, helicopters, and missile weapon systems employ subcontractors using offshore locations and foreign companies for software development.

Last year's Pentagon advisory report concluded that maintaining government-operated factories to build sensitive microchips, for example, would cost too much and that they couldn't keep pace with technological developments. So the government has to decide how much security it really needs--and how much it can afford.