The TikTok-Microsoft deal is one of the weirdest takeover negotiations Lex has ever seen. Like you, we’re agog.
A quick recap of the wildly compressed timeline: on Friday, Microsoft was reported to be in talks to buy the viral video-sharing app from Chinese parent ByteDance. The same day, President Donald Trump threatened to ban the app in the US over fears of data sharing with the Chinese government (something TikTok denies). On Saturday, TikTok users began to say their teary goodbyes. On Sunday, the deal appeared to be back on, when Microsoft hoped to complete discussions by September 15. On Monday, the president seemed to give it his blessing and said the US government should get a cut.
As the haggling escalates these are the questions Lex is asking:
What exactly is for sale?
TikTok is the international version of ByteDance’s Chinese short-video app Douyin and operates in more than 100 countries. However, Microsoft has said it is negotiating to buy TikTok in just four countries: the US, Canada, Australia and New Zealand.
The US, where TikTok says it has 100m users, is the most profitable market for advertisers and the most valuable potential acquisition. But the idea of two platforms with the same name operating in different countries is odd. Then there is India — where TikTok was banned amid a deterioration in relations with China. Could that be revived under a non-Chinese owner?
There is also the question of how ByteDance will untangle the technology and infrastructure between various countries.
How much is it worth?
TikTok is the most popular new social media platform in the US since Snapchat and collects all sorts of valuable location and search history data from its young users. It has the potential to become an advertising gold mine — although a buyer will need to invest in tools that can facilitate automated ads.
ByteDance bought video app Musical.ly for $1bn in 2017, which it then turned into TikTok. Reuters reports that investors think TikTok’s valuation should be 50 times its expected $1bn revenue this year.
To Lex, $50bn sounds high. We believe a $30bn to $40bn valuation is more likely.
The final price tag depends on whether a buyer believes TikTok is the next Snapchat or the next Instagram — as well as ByteDance’s weak negotiating position as a forced seller. Snapchat has about 360m monthly active users and expects $2bn in revenues this year. Instagram has 1bn users and while owner Facebook does not specify sales, analysts at Jefferies expect it to rake in $14bn this year. If TikTok can scale similar heights, then a $50bn valuation looks more attainable.
Will Microsoft be the buyer?
Investors seem to think so, sending Microsoft’s share price up 6 per cent so far this week. Microsoft, a $1.6tn company with more than $136bn in cash, equivalents and short-term investments, certainly has the funds to make the acquisition.
It would be an odd fit. Microsoft is the home of professional network LinkedIn, the least cool social media platform going. It makes the bulk of its money from commercial customers via its Azure cloud business and Office 365 subscriptions. There are no obvious synergies with a teen sensation unless the Xbox video game business can be used.
Alternative buyers could be interested. ByteDance investors, including Sequoia, have reportedly suggested a majority ownership transfer.
Facebook has a social media business. Alphabet has a big advertising presence and Apple has been trying to expand its services and entertainment business. All three may covet TikTok. But all three also face intense antitrust scrutiny. Microsoft, which has evaded Washington’s indignation so far, is a more likely bet.
Still, boss Satya Nadella will have to weigh up the merits of a geopolitically sensitive deal plus the risks of entering a consumer-facing business and the regulatory hassle that comes with it.
Can the US government take a cut?
On Monday Mr Trump said of the deal: “It’s a little bit like the landlord-tenant. Without a lease, the tenant has nothing. So they pay what is called ‘key money’ or they pay something.”
This makes no sense. The US government can demand action against foreign companies over national security concerns. This is what led to the Chinese company Kunlun unwinding its acquisition of gay dating app Grindr. The Committee on Foreign Investment in the United States could try to force ByteDance to unwind its purchase of Musical.ly.
But the president also seems to think that because his threat to ban TikTok might expedite a sale, the US government is due a deal fee. It is not. He has already damaged America’s reputation for free markets by forcing a foreign business to sell to a US counterpart. Taking a cut for the government would smack of a protection racket.
Enjoy the rest of your week,
Deputy editor of Lex
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