M&A Deals

The TikTok deal: hardly clockwork

ByteDance has reached a preliminary “technical partnership” agreement with Oracle for the US operations of TikTok. Oracle announced it had brokered the deal on September 14th, with plans to address US national security concerns over Chinese ownership of TikTok. These developments follow a prolonged bidding process which saw Oracle face off against Microsoft. Oracle, an enterprise software company, and Walmart have agreed to acquire a minority stake in a spin-off called TikTok Global — yet the deal seems to be more complex under the surface.

US national security concerns

The national security concerns over Chinese ownership of TikTok are symptomatic of the rising geopolitical tensions between China and the US (see Elliott Stockdale’s article). The US have previously alleged that data collected on American users could potentially be accessed by the Chinese government and used for disinformation campaigns across the popular video-sharing platform TikTok. TikTok have stressed that the data obtained from American users has been stored in the US, with a backup in Singapore. This is the third time the Trump administration has intervened with high-profile corporate deals on the grounds of safeguarding the public interest.

Oracle and the White House

The US tech group Oracle is chaired by Larry Ellison, one of the few public supporters of President Trump in Silicon Valley. Ellison, the co-founder and chairman of Oracle, hosted a fundraiser in February for President Trump’s 2020 re-election campaign and is rumoured to have views that align with the President’s over China’s position as a superpower. Oracle has had a more antagonistic relationship with China than its bidding rival Microsoft, firing more than half of its research and development team, roughly 900 employees, in China last year. Therefore, with the US government heavily involved in the potential deal over TikTok’s US operations, is Oracle a political ploy by President Trump or will it transpire that Oracle will take TikTok Global to new heights?

Rationale for Oracle

Eyebrows have been raised with regards to the potential deal between Oracle and ByteDance. Oracle is a business-to-business software company, selling database technology and cloud systems to businesses. The company has been heavily involved with the US government intelligence community, having completed contracts for the CIA, Navy Intelligence, and National Security Agency, and Oracle now serve a wide range of industries, from automakers to retailers. So, what benefits could Oracle reap from acquiring a minority stake in a TikTok Global spin-off? TikTok would likely become a new customer for Oracle’s cloud business, with Oracle replacing Alphabet’s Google Cloud Infrastructure on the video-sharing platform. The deal is expected to be highly lucrative for Oracle, with the American company expected to be paid hundreds of millions of dollars annually to manage the app’s data.

Short-form video could become a major player in the entertainment industry, particularly as people’s lifestyles become busier, with TikTok users already reaching 100 million thus far. This is exemplified by the $1bn internal revenue projection for TikTok this year, with this same projection rising to $6bn for 2021. Despite Oracle remaining a niche player in the cloud software industry, with a market share of 2%, the TikTok deal could be the “shot in the arm” the company desperately needs moving forward, according to RBC analysts. This agreement with ByteDance to continue TikTok’s US operations comes less than 5 months after securing Zoom as a client, ahead of market leader Amazon Web Services, Alphabet’s Google Cloud Infrastructure, and Microsoft’s Azure Cloud. If Oracle can back up its 2020 client acquisition strategy by attracting more big clients going into 2021, then it could start to challenge the bigger firms in the market.

The fine print

With this deal being very much in the political spotlight, it comes as no surprise that the technicalities are still to be confirmed, with no clear alignment between Chinese and US media sources as to the exact details of the agreement. ByteDance will place TikTok Global into a separate company, with 80% owned by the Chinese company and the remaining 20% split between Oracle and Walmart, as 12.5% and 7.5% respectively. With both US companies reported to purchase their respective minority stakes for $7.5bn and $4.5bn, this would lead to an estimated TikTok valuation of $60bn. TikTok will only be majority-owned by US investors if you account for the 40% ownership stake that Sequoia Capital and General Atlantic have in ByteDance. Even though a future, planned IPO would dilute Chinese ownership, Josh Hawley, Republican senator from Missouri, said that the deal is “flatly inconsistent with Mr Trump’s original executive order” which demanded a full sale to satisfy national security concerns.

Beijing’s imposition of export controls mean the key algorithm, which controls what videos are displayed to app users and when, will remain in China with ByteDance. This, along with the fact that ByteDance is set to retain direct majority ownership over TikTok, makes you question why President Trump has “agreed in concept” to the deal. The answer to this may come in the form of the board of directors, with 4 out of 5 members set to be American, or the suggestion that ByteDance will contribute $5bn to a US educational fund, in a move which would meet President Trump’s initial promises of making the Chinese company pay the US government as part of any deal made. The conflict between majority ownership and company control is one which makes this deal so interesting. A possible route TikTok could take is to be creative with its corporate structure in a way not too dissimilar to tech giants Facebook — where Mark Zuckerberg owns 12.9% of shares but actually has 58% of the voting rights, due to super-voting shares.

Getting the deal done

Any final confirmation on the agreement will depend on approval from both the US and Chinese governments, so a compromise must be found. The US Department of Commerce said it would delay an order to remove TikTok from Apple and Google’s US app stores to September 27th, giving the deal more time to come to fruition. As the deal stands, ByteDance is set to be the biggest winner, having retained the key algorithm which differentiates TikTok as a video-sharing platform. A lofty $60bn valuation of TikTok could also inflate the value of ByteDance, as its majority shareholder. This deal is one of the most evident examples of China’s rising influence over global M&A.


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