Unfriendly takeover: US gives Microsoft the go-ahead to buy TikTok

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The story of the ban of the Chinese video service TikTok in the United States received an unexpected continuation this week. Microsoft is thinking about buying the American division of ByteDance, the creator and owner of this social network. US President Donald Trump initially rejected this idea, but then changed his position, allowing Microsoft to buy TikTok, provided that part of the transaction amount would be in the US budget. The Chinese authorities have strongly condemned the American “robbery” of a local high-tech company, but the reality is that Beijing is unlikely to aggressively defend ByteDance, unlike Huawei, with which America has been at war for several years.

The social network TikTok, which is a service for creating and watching short videos, began as a purely domestic Chinese product in 2016, but has since expanded rapidly in global markets, becoming the coolest and most successful “unicorn” of the second half of the 2010s. In a couple of years, the number of users worldwide reached 800 million, and in the United States, the number of active users reached 50 million daily, which is more than Twitter and only slightly less than Snapchat.

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However, from the very beginning of TikTok’s active expansion, accusations of illegal use of personal data began to arise against the social network. Simply, the network spies on its users for the benefit of the Chinese government. At the end of 2019, ByteDance was sued in the United States. The plaintiffs said that the application created accounts without the knowledge of the users who downloaded it, and then transferred data about them to other Chinese companies, in particular Tencent and Alibaba. A little earlier, India stopped a step away from banning TikTok, accusing the application of “inspiring pornography.” In 2020, there was a conflict on the India-China border, and the service was the first to get hit – last month it was completely banned in India, along with 58 other Chinese apps.

Soon the baton again passed to the United States. President Donald Trump warned last week that the administration was preparing to ban TikTok and that the bill had already gone days. The social network has proven to be a very convenient target in the newly flaring conflict between the two superpowers. In addition, rumor has it that Trump harbored a special grudge against the service after its users allegedly thwarted a rally of supporters of the current president in Tulsa with the help of a flash mob. Be that as it may, the American state has enough tools to enforce the ban – for example, the White House may order Apple and Google to remove the application from their stores. The service will not have new users in the US, and old ones will not be able to receive notifications.

Such a decision will surely become unpopular and greatly upset many users of the service. Soon, an alternative option emerged, which boiled down to the fact that Microsoft would buy the American division of TikTok from ByteDance (which actually operates in several other countries, including Australia and New Zealand). Trump initially denied this opportunity to one of America’s largest corporations, stating, “We are not a land of mergers and acquisitions.” But a few hours later, he changed his mind after talking with Microsoft CEO Satya Nadella, as well as discussions with advisers (Larry Kudlow) and Republican senators (Lindsay Graham and Marco Rubio).

Nevertheless, the deal in Trump’s version was framed with a number of conditions. First, it must take place in a short period of time. The president gave Microsoft a deadline until September 15th. The second and more interesting condition: part of the amount paid for the American division of TikTok should go directly to the US budget.

The offer is unprecedented – in recent decades, the American government has never taken a share from the purchase of an asset in which it did not hold its block of shares. How it will be formalized in legislation, no one really knows. Meanwhile, Trump, a professional realtor, likened such a transaction to a special form of collateral found in real estate. For example, a potential tenant sometimes pays a lump sum to secure a lease. According to the American president, the state in this case acts as a lessor and, accordingly, is in its right to demand this payment. It is not yet clear what specific share Trump is targeting, but he immediately made a reservation that it would be “substantial.”

Another condition on the part of the president was Microsoft’s commitment to buy the American segment of TikTok at once and in whole, and not in parts, gradually increasing its own share.

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Photo: REUTERS / Thomas Peter

For Microsoft, the benefits of this deal are mixed. On the one hand, this business is one of the fastest growing in the world. Its approximate market value could be up to $ 50 billion. However, it is unclear if TikTok is currently operationally profitable. Most likely not, but this is generally a normal situation for a “unicorn” – many of them have been unprofitable for years. In the end, you can remember Tesla, which cannot fix annual profits to this day (after 15 years of operation), which does not prevent it from being one of the largest companies in the world by market capitalization. With money, Microsoft is all right, the corporation has more than $ 100 billion of liquidity at hand, which makes it possible to pull off even the largest deal without any problems.

The acquisition of TikTok will allow Microsoft to fully challenge other IT giants, including Facebook and Google, by merging a number of its consumer businesses such as LinkedIn, Minecraft and Xbox into a separate unit.

At the same time, do not forget that Microsoft has not achieved any fantastic success in the consumer IT industry. Her core business is product development for corporate and other institutional clients. Too much emphasis on new asset management can drain the resources needed to run a traditional business.

In addition, although TikTok is promising, it still does not guarantee high income for the future. Based on the ratio of the estimated cost to the expected annual revenue, then it is about 50: 1, which is too much even for a “unicorn”. Buying in a hurry within a specified period of time can also lead to numerous overlaps and a weakening of the asset itself, which may be critical for it during a period of rapid growth.

China’s own reaction to the upcoming TikTok ban has been sharply negative. In an article published in the China Daily, which is considered the English-speaking mouthpiece of official Beijing, he was called nothing more than theft. ByteDance CEO Zhang Yiming wrote in an open letter to company employees that Trump’s real plans, despite backing the deal, were not to save TikTok, but to kill it.

At the same time, there is no need to count on the PRC in this case to take any tough countermeasures. ByteDance is not a strategically important company in China, although the huge success of the social network with Chinese roots undoubtedly warms the pride of the Beijing elite. Huawei, which has become a bone of contention between China and the United States in the past few years, is much more significant and more closely associated with the PRC leadership. Beijing, most likely, will not dare to go to a conflict over this. Especially if the complete ban is nevertheless replaced by a deal with a sufficiently high value. Not to mention, Microsoft is one of the few American companies that is highly respected and well-liked in China, so the deal with it will not be perceived as a hostile takeover – even under pressure from the White House. In fact, Zhang Yiming also admitted the inevitability of the concession, saying that his company is obliged to obey US laws. So for now, there is little to prevent one of the fastest growing Internet businesses in the world from moving into American hands.

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