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TikTok struggles to strike a deal as deadline looms for sale of US business

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Happier times: Bytedance founder Zhang Yiming shows Apple’s Tim Cook how to use TikTok

Bytedance CEO Zhang Yiming has had three separate chances to sell the social media firm that he founded in 2012. He decided to stay put each time, turning down the several chances to become a multi-billionaire overnight. But this time he doesn’t have much of a choice

Bytedance is a rare, high-profile tech firm in China – given neither Alibaba nor Tencent are shareholders (they have their tentacles into most of the companies that matter). Bytedance has always been an “independent platform” with a “very special meaning that goes beyond financial considerations,” Zhang told Caijing in an earlier interview. That also shaped how he looked at M&A. For instance, would he ever seek a strategic partner, he was asked? “If a company can help us to achieve bigger global success, I won’t be against the idea. But I don’t think there is such an opportunity now,” Zhang told the magazine.

That interview was published in December 2016. That was at a time when Bytedance had just steered itself out of a regulatory crisis when Chinese newspapers took on its news aggregating app Toutiao over copyright infringement (see WiC244). It was also the period when the entrepreneur was about to launch the overseas version of Bytedance’s short video app TikTok (called Douyin in China).

In recent weeks Zhang has been forced into a major rethink on international M&A. In fact the 37 year-old is being compelled to take a huge decision on TikTok’s future, squeezed by extraordinary pressure from both the Chinese and US governments, following Washington’s directive to Bytedance that it must close or sell the American unit of the hugely popular app.

What’s the latest on the TikTok sale?

The Trump administration – citing national security concerns that TikTok might share American user data with the Chinese government – has threatened to ban the video app in the US. As one of the more controversial offensives in his tech and trade tussle with Beijing, the American president signed an executive order last month setting a September 15 deadline for TikTok to agree a sale of its American operation or risk being shut down in the US.

Speaking to reporters on Tuesday Trump also reiterated his highly unconventional expectation that the federal government should also be “compensated, well compensated” for forcing the deal through.

In response TikTok and a member of its 1,500 person workforce in the US have filed separate lawsuits challenging the executive order. “The [Trump] administration ignored our extensive efforts to address its concerns, which we conducted fully and in good faith,” TikTok complained in a press release. “We do not take suing the government lightly, however we feel we have no choice but to take action to protect our rights, and the rights of our community and employees.”

When Trump executed his order most commentators initially expected Zhang to give in and sell the prized asset at the core of his global ambitions. Retreat from international markets seemed imminent, with CNBC reporting that TikTok had singled out a bidder for its American, New Zealand and Australian businesses (some reports said its Canadian operations have also been included in the lot).

The sale was forecast to fetch as much as $30 billion, the TV network suggested. Bytedance’s long-term investors, including the likes of American fund houses Sequoia and General Atlantic, were initially sounded out as potential suitors. These investors have since teamed up with tech giant Oracle, according to the Wall Street Journal, which reports they want to purchase TikTok outright.

However, Chinese media seems to think that Microsoft is leading the race to acquire the app, in part because Zhang was a former Microsoft employee before starting his own venture. The software heavyweight said as early as August 2 that it had been in talks with both the Trump administration and Bytedance. It then emerged as a frontrunner following reports last week that it was teaming up with Walmart in a high-powered consortium that also included Softbank and Google’s parent Alphabet.

Yet a final deal was still unconfirmed as of Thursday this week, with the Wall Street Journal noting that talks between the parties had hit a major snag after a late intervention by the Chinese government.

What is Beijing’s stance?

In early 2009 the Chinese government rejected Coca-Cola’s $2.4 billion takeover bid for juice maker Huiyuan, citing antitrust concerns that arose from a newly-enacted competition law.

Beijing now seems to have given itself the final say on the TikTok sale with a last-minute rule change that could scupper buyer interest. In recent weeks it had already complained bitterly about what it views as yet an another attack on one of the country’s leading brands. “US politicians’ attempts to kill Chinese firms such as TikTok, WeChat, and Huawei by forcibly putting ideological labels on them under the guise of national security show they are full of lies and slander; their nature is to bully the market through deception,” a spokesman for the foreign ministry said last week.

Adding some muscle to those defiant words the Ministry of Commerce then announced last Friday that it had added 23 items to a list of technologies subject to export controls. It was the first time in 12 years that the list had been updated and the newcomers include “personalised information service technology based on data analysis” and “AI interface technology”. These are two of Bytedance’s core strengths in pushing content to customers and a key part of what has made its apps Toutiao and Douyin (TikTok’s China equivalent) so popular.

TikTok, of course, operates on the same core algorithms.

Bytedance has said that it will comply with the government’s new rules, although it added that it is seeking more clarification from the authorities. However, if the algorithms cannot be ‘exported’ or kept up to date, the value of TikTok’s businesses overseas will decline dramatically for the potential buyers. A person close to the talks likened TikTok without its algorithm “to a fancy car with a cheap engine,” according to the Wall Street Journal. Indeed, analysts say that retaining users without Bytedance’s addictive and constantly tweaked AI-based algorithm will be a tough proposition. Microsoft and Oracle both understand this.

That has soured the negotiations. “The complexity involved has reduced the chances that a deal could be completed soon,” the Wall Street Journal also reported on Wednesday, citing contact with people familiar with the transaction.

How does TikTok fit into the plans of Microsoft and Walmart?

According to market research firm Sensor Tower, the TikTok app was downloaded more than two billion times in the first seven months of this year, making it one of the world’s most popular social media platforms. It follows that the three year-old app has emerged as one of the biggest threats to the likes of Facebook, which has tried to respond to the challenge with rival products such as Instagram Reels.

In a statement published early last month, Bytedance said it was still “committed to becoming a global company” despite “unimaginable difficulties”, including the “international political environment” and “plagiarism and the smears by competitor Facebook”.

Prior to TikTok’s emergence, the dominance of a quartet of American tech firms (Facebook, Apple, Amazon and Google) had worried Washington politicians on antitrust grounds. If Microsoft is successful in buying TikTok, the software giant would have a new opportunity to compete with its (mostly) younger rivals, and make itself more relevant in the social media sphere (it already owns LinkedIn). Microsoft’s cloud computing operation and knowhow could also offer strategic value for TikTok’s continuing development in the US.

Walmart, an ‘old economy’ stalwart, looks like a more surprising suitor, although it has been trying to reinvent itself as a force in e-commerce. Its role in the TikTok deal flows from this strategy. “The way TikTok has integrated e-commerce and advertising capabilities in other markets is a clear benefit to creators and users in those markets,” Walmart said in a circular that explained its position. “We believe a potential relationship with TikTok US in partnership with Microsoft could add this key functionality and provide Walmart with an important way for us to reach and serve omnichannel customers, as well as grow our third-party marketplace and advertising businesses.”

Walmart might even forge a similar partnership with Douyin in China, where the US behemoth is the largest foreign retailer. In 2016, it acquired a 5% stake in JD.com, a major Chinese e-commerce platform. A deal with Douyin’s in-app shopping function could provide another route into online sales by riding on China’s fast-growing livestreaming e-commerce market.

What would a sale say about the global ambitions of China’s other tech giants?

To many it is mindboggling to value a three year-old firm at $30 billion or more (although news this week that Apple’s market capitalisation has exceeded that of the entire Footsie 100 in the UK shows that strange things are happening in tech valuations).

Such a price tag would also put TikTok on a par with more established Chinese internet video companies, such as iQiyi and Bilibili, which are both listed on Nasdaq.

We first reported on the concept of the TMD trio in WiC394. This new acronym consisted of Toutiao (aka Bytedance), Meituan-Dianping and Didi Chuxing – three brands viewed as the likely challengers to the dominant BAT trio (Baidu, Alibaba and Tencent) in the online sector.

We noted at the time that the BAT had built a formidable wall around their businesses in China (especially the ecosystems of Alibaba and Tencent) and that the TMD trinity needed to push into the global market for growth. (Didi, for instance, started to roll out its ride-hailing services in Russia last week.)

The majoritity of start-ups are more reluctant to leave their comfort zones if they still see significant growth potential on their own home soil. Yet Zhang has always claimed that Bytedance has a much broader vision. “We were born to be global,” he told an audience at an event at Tsinghua University in 2018.

Bytedance says that it started discussing its international strategy as early as 2012 – the year that it was established in an apartment in Beijing. It began its global push in 2015 with a “buy and build” approach. In late 2017 it acquired Musical.ly, a Shanghai-based video platform with a huge presence in the US. That supported the foundation of TikTok but such was the speed of the takeover that Bytedance failed to file for appropriate vetting of the deal by CFIUS, the regulator that oversees foreign acquisitions in the US and rules if there are national security concerns. Absent this verdict the Trump administration stepped in with its own executive order in mid-August to invalidate the purchase of Musical.ly, by invoking threats to US security.

TikTok’s prospective buyers are now said to be discussing new ways to structure an acquisition, including buying the app’s US operations without some of its key software, presumably at a much lower price.

Another possibility being considered is licencing the algorithms from Bytedance, although that may fail to get approvals from Washington officials, who want to sever any relationship between Bytedance and TikTok in America.

A third avenue is that the parties ask for a “transition period” from the US national security panel overseeing the deal, Reuters reported on Wednesday.

Beijing’s own intervention could be designed to give Bytedance more time to get a better deal. But whether Trump will extend the September 15 deadline or simply demand that TikTok is switched off is hard to predict.

He certainly won’t mind looking tougher on a Chinese company in light of the upcoming presidential election. But his campaign team may also be warning against angering TikTok’s 1oo million users in the US, some of whom might take their revenge at the ballot box (especially those content creators who have been building careers through their followings on the app).

Looked at in the broader context, the Chinese government’s new restriction on technology transfer is in some ways an approach that mirrors the Trump administration’s weaponisation of American semiconductor tech last month. In this case it is banning the export of Bytedance’s leading edge algorithmic know-how. And while a national security argument hasn’t been cited in the government’s intervention in the TikTok deal, there is an underlying logic in refusing to be coerced into selling valuable technology, with both countries hoping to establish a lead in AI expertise.

Should both governments keep to their current courses, a cleaner sale of TikTok looks much harder to complete. Then the question for Beijing would be how – if at all – Zhang’s firm would be compensated if a deal evaporates and TikTok collapses, its value eviscerated. Of course, this would harm Bytedance’s US investors like Sequoia and General Atlantic as well, signalling some of the pain would be shared by American interests.

At the very least the TikTok saga is yet another instance of the challenges of decoupling the highly interconnected business and investment worlds of China and America. One man who has reached a personal conclusion on this conundrum is Kevin Mayer, whom TikTok poached from Disney just three months ago (see WiC497). Last week he resigned from his dual role as global CEO of TikTok and COO of Bytedance. A major part of his remit was to help the company navigate the political shark tank in Washington, but with Bytedance heading for an exit in the US that role was going to be much-reduced.


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