Microsoft Aims for a Deal to Buy TikTok’s U.S. Business

(WSJ) Microsoft Corp. said it will move forward with plans to buy the U.S. operations of the hit video-sharing app TikTok, capping weeks of covert dealmaking that were almost upended by an 11th-hour intervention from President Trump.

The transaction could reshape the global tech landscape and further strain already tense U.S.-China relations.

Following a phone call Sunday between Microsoft CEO Satya Nadella and Mr. Trump, the company put out a blog post saying it would move quickly to pursue discussions with TikTok parent ByteDance Ltd. of Beijing and aims to complete the negotiations by Sept. 15. The statement, the software giant’s first confirmation it was interested in acquiring TikTok’s U.S. business, said the deal talks also entail the app’s service in Canada, Australia, and New Zealand.

“Microsoft appreciates the U.S. Government’s and President Trump’s personal involvement as it continues to develop strong security protections for the country,” the company said in its statement.

It added it would ensure that the data of American TikTok users is transferred to the U.S., where it would remain. Microsoft said TikTok operations under its ownership would build on the popular user experience while adding privacy and security protections.

For weeks, TikTok’s Chinese parent company has discussed selling the app’s U.S. business to Microsoft, in talks involving U.S. government officials. A deal seemed close Friday, but then Mr. Trump expressed opposition, saying he preferred an outright ban of the app and throwing a wrench into the talks.

The deal would land Microsoft the breakout social-media player of this decade. It would give Washington a win over Beijing by bringing a Chinese technology crown jewel under U.S. ownership. For TikTok parent ByteDance it would resolve the national-security concerns that threatened to thwart its U.S. operations.

The proposed transaction gained the blessing of senior Trump officials, including Treasury Secretary Steven Mnuchin, who saw value in an American company getting access to sophisticated TikTok algorithms that decide what videos users are served. Others, including Vice President Mike Pence, have voiced concerns. At a Friday morning meeting, officials from the Committee on Foreign Investment in the U.S., which has been reviewing an earlier TikTok transaction, were told a Microsoft deal was imminent.

In Friday evening remarks to reporters aboard Air Force One, Mr. Trump said he opposed a Microsoft deal and wanted to use his executive authority to ban the app in the U.S., a move favored by hawkish trade adviser Peter Navarro.

The comments, when reported, floored those involved in the talks. ByteDance quickly made some concessions, saying CEO Zhang Yiming would sell his stake in TikTok. It wasn’t clear in the moment whether Mr. Trump was set on shutting TikTok out of the U.S. or simply negotiating. “Have you read ‘The Art of the Deal,’” one national-security official responded when asked.

The companies paused the talks as they sought clarity from the administration.

Mr. Trump recently heard from advisers inside and outside the White House about a need to save TikTok in the U.S. The app, filled largely with dance-offs and jokey skits, has become ingrained in the lives of millions of teenagers, some of them potential voters.

The negotiations over TikTok show the effects of Mr. Trump’s push to close U.S. borders to Chinese companies deemed potential national security threats—after decades of China keeping out many American firms—and also show how global corporations can be used as political bargaining chips. A deal with Microsoft buying TikTok’s U.S. operation would resolve one of the most dramatic corporate battles in the U.S.-China feud.

The race to rewrite TikTok’s destiny in the U.S. started in early July, after Secretary of State Mike Pompeo raised the possibility in a broadcast interview of banning the app in the U.S. Officials subsequently said the app posed a security threat.

U.S. officials have expressed concern that TikTok would let China’s authoritarian government have access to the data TikTok collects from Americans and other users. TikTok has said it would never hand over such data. Under China’s laws, companies operating there must comply with any government request to turn over data.

Officials also worry that the app could be used to spread Chinese propaganda and that the platform’s moderators are censoring content to appease Beijing. The Journal has reported that TikTok previously blocked videos related to politics, including those about the Hong Kong protests. More recently, it has allowed some political content on the app. The State and Defense departments keep TikTok off employees’ government devices.

This account of what happened behind the scenes is based on interviews with people involved in the talks or familiar with the discussions.

ByteDance tried to avoid offloading TikTok’s U.S. operations, as Mr. Zhang believed TikTok could eventually challenge Facebook for users and ad revenue. TikTok globally isn’t profitable. ByteDance projects the app will have $1 billion in revenue this year and $6 billion next year, said a person familiar with it.

ByteDance increasingly tailors its content policies to the various places where it operates.

For Mr. Zhang, a tie-up with Microsoft would hand U.S. operations of his creation to a company with deep pockets to support it. But the tie-up would mean surrendering full control of the first Chinese app to be a global smash.

In a series of discussions with U.S. officials, ByteDance executives offered to create an independent TikTok board, separate from Bytedance, and proposed having a group of U.S. investors increase their stakes so they would own the majority of TikTok. Former Walt Disney Co. executive Kevin Mayer is TikTok’s CEO.

ByteDance’s investors include SoftBank Group Corp. of Japan’s Vision Fund as well as large funds such as General Atlantic and Sequoia Capital. ByteDance was valued at $100 billion in a March fundraising round. Some investors prepared a bid that valued TikTok as a stand-alone at more than $30 billion, according to one person briefed on the bid. Microsoft said it might invite other American investors to participate in its deal.

Some U.S. government officials embraced the majority-control proposal, seeing it as a way to argue that a Chinese technology crown jewel had fled the Chinese Communist Party and embraced the U.S.

Trump administration officials said they wanted TikTok to be fully American-owned, and simply allowing minority owners to increase their stakes wasn’t viewed as a win for the administration.

ByteDance officials were desperate to avoid a U.S. TikTok ban. TikTok’s largest market, India, recently blocked the app after a deadly border clash with China. A ban in the U.S. as well might have a domino effect, said Matthew Brennan, a China-based tech consultant.

A number of suitors were said to be intrigued by the idea of owning the app but Mr. Zhang zeroed in on Microsoft.

It was familiar territory. Mr. Zhang worked at Microsoft briefly in 2008 but left after a short stint because, he has told Chinese media outlets, he felt it stifled his creativity.

For Microsoft’s Mr. Nadella, buying TikTok would add a huge pool of mostly young social-media users to a company that has thrived during his tenure largely by focusing on corporate customers.

Mr. Nadella has done several big deals since taking over in 2014, including the acquisition of LinkedIn in 2016 and of coding-collaboration site GitHub Inc. in 2018. They expanded the company’s offerings beyond legacy products and targeted fast-growing areas such as cloud computing, helping the maker of Windows operating system software quintuple its market value in six years to $1.55 trillion.

Microsoft has had a more mixed experience with consumer-facing businesses. Its search engine Bing has struggled to gain traction against Google, and Microsoft largely abandoned the smartphone business after Mr. Nadella took over. In June, it shut down Mixer, its live-streaming service targeted mainly at videogame enthusiasts, and said it was working to move broadcasters and viewers over to Facebook.

TikTok could tie in with Microsoft’s most successful consumer-focused business line, its Xbox gaming platform, sales of which have boomed during the pandemic. Xbox also serves younger users, for whom videogames have come to function as social-media networks of their own, with players interacting and chatting in real-time over the internet. A deal also would add gender balance to the heavily male Xbox user base. A majority of TikTok users are female.

An acquisition also could bring risks of the kind Mr. Nadella has largely avoided. It would add to Microsoft’s already colossal size at a time when other large tech companies are under scrutiny for how they wield market power. Owning TikTok would thrust Microsoft into a sector, social media, beset by controversies over abuse, misinformation and free speech.

By late July, the framework was almost in place for a deal in which Microsoft would buy TikTok’s U.S. operations and Mr. Zhang would retain a minority stake.

As the debate continued, some inside the White House cautioned about a political downside to blocking the deal. While TikTok has been used by Trump critics, some officials pointed out that many young Republicans also use the app, as well as the children of conservatives.

A prominent TikTok account that features young conservatives, called @ConservativeHypeHouse, posted to the platform pointing to seven billion views the hashtag #Trump2020 has received on TikTok, compared with the approximately 900,000 views #Biden2020 has received.

Teenagers across the U.S. also rallied to TikTok’s defense, posting videos with the hashtag #SaveTikTok, which has been viewed more than 730 million times. TikTok says it has 100 million users in the U.S.

Others in the White House appealed to the president’s skepticism of Facebook and Twitter, arguing that TikTok represented competition for them. Mr. Trump’s team described the potential for two victories for the president: blocking the Chinese Communist Party from accessing user data and putting a U.S. company in charge of the app.

“Have an American company like Microsoft take over TikTok,” Sen. Lindsey Graham (R., S.C.) tweeted Saturday night. “Win-win. Keeps competition alive and data out of the hands of the Chinese Communist Party.”

In addition to Messrs. Mnuchin and Pompeo, White House counsel Pat Cipollone and Matthew Pottinger, the deputy national security adviser, have been involved in trying to broker the deal, White House officials said.

Allies of the president reached out to Microsoft Saturday evening, urging it to post a simple, positive message on Twitter signaling that Microsoft wanted to help keep TikTok alive, and in American hands. These people told the company the president was warming to a deal and urged Microsoft officials to seize the opportunity.

In a statement posted on TikTok Saturday, Vanessa Pappas, TikTok’s U.S. general manager, assured users about the future of the platform. “I want to say thank you to the millions of Americans who use TikTok every day,” she said. “We’re not planning on going anywhere.”

Source: Wall Street Journal by Georgia Wells, Michael C. Bender, Kate O’Keeffe and Cara Lombardo

Microsoft Aims for a Deal to Buy TikTok’s U.S. Business Microsoft Aims for a Deal to Buy TikTok’s U.S. Business Reviewed by TechCO on 8/04/2020 Rating: 5

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