Microsoft began talks with ByteDance to take over it's popular app TikTok. Photo / Getty Images
Neither side wanted a big deal. But what began as talks about a small investment ballooned with interventions from President Trump.
When Microsoft began talking this summer with popular video app TikTok and its Chinese parent company, ByteDance, no one had any intentions of pursuing a blockbuster deal.
With tensions swirling between the United States and China, along with the complexities of running a social media company, any large acquisition appeared too treacherous to navigate. So Microsoft discussed taking a small stake in TikTok and becoming one of the app's minority investors, said four people briefed on the conversations.
Even a small deal would be a win-win, the thinking went.
For Microsoft, a minority investment would potentially bring TikTok over to using its Azure cloud computing service, immediately making the app one of Microsoft's biggest cloud clients, said the people, who declined to be identified because the details are confidential. (TikTok has been using Google's cloud computing services to power its videos.)
For ByteDance and TikTok, a deal with Microsoft could help propel the valuation of the app's business outside China to as high as US$80 billion, the people said. It would also provide TikTok with the endorsement of a blue-chip American company to mollify the Trump administration, which had called TikTok's Chinese ties a national security threat.
Yet what started as discussions about a small investment morphed into a big, messy, political soap opera. Pushed by President Donald Trump, who has ordered TikTok's US operations to be sold or to cease operating, ByteDance is now discussing selling parts of TikTok's global operations to several potential bidders. And with so many groups jumping into the talks to get a piece of any deal, all are trying to drive their own interests and agendas.
Apart from Microsoft, the bidders include Oracle, the enterprise software company, the people with knowledge of the talks said. Bankers and investors, some authorized and some simply trying to gin up a deal, have also called Netflix, Twitter and Verizon about buying TikTok, they said, though it is unclear if those companies have a genuine interest in an acquisition. Microsoft, with the deepest resources and a market value of more than US$1.6 trillion, still appears the furthest along for now, the people said.
The sale scenarios on the table are head-spinning, the people said, because all of the parties — ByteDance, TikTok, their investors and the bidders — want to get the most out of any deal. The talks have covered everything from selling just TikTok's North American operations all the way to every part of TikTok, minus ByteDance's Chinese-only video app Douyin, they said.
A deal price is unclear, though numbers have ranged from US$20 billion to US$50 billion depending on what parts of TikTok will be sold, the people said. The talks are fluid, and no deal may ultimately be reached.
Even if one does take place, a TikTok sale — which has become a referendum on the US-China relationship — may still be disrupted if Beijing or Trump weighs in. Trump has been highly involved, including talking to Microsoft's chief executive, Satya Nadella, and saying that Oracle could handle buying TikTok. In an Aug. 6 executive order, he imposed a deadline for TikTok's US operations to be sold by September 15.
On Monday, TikTok sued the US government, arguing that the executive order had deprived it of due process. The suit could give TikTok more time to operate in the United States if the courts order it, a stalling tactic that may help the app wait it out past the November 3 election.
Steven Davidoff Solomon, a law professor at the University of California in Berkeley, who contributes to The New York Times, said the United States' forcing such a huge company to sell itself was "really unprecedented." He added, "This is a forced sale, and ByteDance is trying to keep it from being as much of a fire sale as possible."
This account of TikTok's deal discussions was based on interviews with more than a dozen people who were involved in or were briefed on the situation. They spoke on the condition of anonymity because they were not authorized to speak publicly.
Representatives from TikTok and ByteDance, Microsoft, Netflix, Twitter, Oracle and the White House declined to comment.
A spokesman for China's Foreign Ministry, Wang Wenbin, called Trump's executive order a "naked act of bullying" and added that the U.S. government would eventually "reap what it sows."
TikTok, which ByteDance created partly out of a US$1 billion purchase of lip-syncing app Musical.ly in 2017, has become a phenomenon in the United States and elsewhere. More than 100 million Americans regularly use the app, the company has said, especially teenagers and 20-somethings.
Last year, as tensions between the United States and China worsened, the Trump administration began scrutinizing TikTok and ByteDance. In November, the Committee on Foreign Investment in the United States, a powerful panel known as CFIUS that reviews foreign acquisitions, opened an inquiry into ByteDance's deal to buy Musical.ly after lawmakers voiced concerns that TikTok was giving data on its American users to Beijing.
TikTok has denied that it helps Beijing. To reduce the US pressure, Zhang Yiming, ByteDance's chief executive, began consulting with a small group of investors in his internet company, including Sequoia Capital and General Atlantic. ByteDance, which is privately held, has been valued around US$100 billion.
Doug Leone, one of Sequoia's partners, and Bill Ford, chief executive of General Atlantic, became Zhang's bridge to the White House, the people with knowledge of the talks said. In their conversations, the Trump administration had specific stipulations: First, it wanted TikTok to overhaul its governance and shareholder structure to reduce ByteDance's ownership of the app. Second, it wanted guarantees that TikTok's American user data be stored on US servers.
The firms needed a major US tech partner to get the deal done, the people close to the talks said. Zhang and the investors figured that Facebook, Google and Amazon were under too much antitrust scrutiny. But Microsoft, with its cash hoard of US$137 billion, cloud expertise and strong government relationships, could work.
Zhang, a former Microsoft engineer, reached out to Microsoft executives to gauge their interest, said one person with knowledge of the talks. Sequoia and General Atlantic declined to comment.
By July, Microsoft joined the talks. At the time, the discussions centered on Microsoft making a minority investment in TikTok, the people said. Between the US-China tensions and the pressures of operating a social media company, Microsoft executives were hesitant about a big deal, said people briefed on the conversations. ByteDance and Zhang also wanted to retain some ownership of TikTok, they said.
Yet as the talks progressed, Microsoft grew warmer on a potentially larger deal with TikTok. While Microsoft has lots of data about industries like gaming and workplace software, it has little information about people's social media behavior. TikTok's user interaction information could strengthen Microsoft's data science operation, the people briefed on the talks said.
TikTok could also be linked to Microsoft's US$7 billion advertising business. Together, that could make a meaningful difference in Microsoft's growth, they said.
ByteDance and Microsoft came to see an acquisition of TikTok's US operations as a cleaner option, they added. Microsoft could allow TikTok to operate as a stand-alone unit, similar to the way it had treated past large acquisitions, such as its US$2.5 billion acquisition of the company behind the video game "Minecraft" in 2014 and its US$26 billion purchase of professional networking site LinkedIn in 2016.
All the while, Trump administration officials were keeping an eye on the situation. Last month, Treasury Secretary Steven Mnuchin, who is chairman of CFIUS and holds the final word on the panel's recommendations of ByteDance's purchase of Musical.ly, spoke with TikTok and Microsoft about how TikTok's data should be on US servers, three of the people said.
On July 31, Mnuchin presented the CFIUS analysis of the ByteDance-Musical.ly deal to Trump, two people said. The recommendation: that ByteDance be ordered to sell TikTok to an American owner, with Microsoft acquiring most of TikTok's business and the stakes held by ByteDance's Chinese shareholders winnowed to a minority investment.
A spokesman for the Treasury and Mnuchin declined to comment.
But aboard Air Force One later that day, Trump said he planned to ban TikTok entirely. Several of Trump's advisers were furious at the derailment of their recommendation, saying that China hawks like Peter Navarro, White House director of trade and manufacturing policy, had exerted too much influence, according to White House officials and others close to the president.
In a statement, Navarro said, "Nobody exerts 'influence' over President Donald J. Trump. He listens carefully to a wide range of often sharply competing views and then he makes the best and most informed decision."
The next 72 hours were chaotic. News leaked that Microsoft was in talks to acquire TikTok. Private equity firms and bankers circled. That briefly included Stephen A. Schwarzman, chief executive of the Blackstone Group, said people familiar with the talks. Blackstone declined to comment.
That weekend, Trump called Nadella about TikTok. Trump said ByteDance had 45 days to complete a sale of TikTok's business in the United States. He added that any deal should help the U.S. government in some way, perhaps in the form of job creation or other economic benefits, or some kind of offering to the Treasury Department.
Privately, officials at Microsoft and TikTok were shocked. The 45-day window put TikTok at a disadvantage in negotiating the best deal. Trump also seemed to be arguing for "tipping the waiter," essentially offering a percentage of the deal to the Treasury, the people said.
On August 2, Microsoft issued a statement about its pursuit of TikTok and said it would provide "proper economic benefits to the United States, including the United States Treasury." It did not elaborate on what that meant.
A few days later, Trump signed his executive order to block TikTok if it was not sold by mid-September. A week later, he issued another executive order giving ByteDance 90 days to close such a deal.
Since then, other potential suitors have emerged, including Oracle. ByteDance, backed into a corner by the White House, wants the best price for TikTok — and not from only one bidder in Microsoft. Sensing ByteDance's weakness, more potential acquirers are kicking the tires on the hot, fast-growing app. All of that may turn off Microsoft from a purchase.
Even as deal discussions have continued, TikTok sued the US government Monday over Trump's executive order.
"We far prefer constructive dialogue over litigation," the company said in a statement. But given the executive order, it said, "we simply have no choice."
Written by: Mike Isaac and Andrew Ross Sorkin
© 2020 THE NEW YORK TIMES
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