By Aron Adamski, BSc Economics @LSE
OVERVIEW OF THE DEAL:
- Acquirer: Microsoft Corporation
- Target: TikTok U.S.
- Industry: Social Media
- Estimated value: $15-$30B
- Financing: n/a
- Announcement Date: n/a
- Acquirer Advisors: n/a
- Target Advisors: n/a
After Donald Trump vowed to ban TikTok in the US, ByteDance told the White House that it is willing to divest its US operations completely. Despite the initial resistance, Donald Trump now has abandoned his opposition to Microsoft buying TikTok’s American operations, but also wants a cut of the deal for the US Treasury in exchange for approving the acquisition.
“The US should get a very large percentage of that price, because we’re making it possible.” ~ Donald Trump
Under the new proposed deal, ByteDance would exit completely and some US-based investors, such as General Atlantic and KKR, may get the chance to acquire minority stakes.
The potential transaction would include TikTok’s business in the US, Canada, Australia and New Zealand as they come under the American branch of TikTok.
The rumour says that the bid would value TikTok at 50x its projected 2020 revenue giving a valuation of $50B. However, that valuation is likely to be revalued downwards as TikTok is in a distressed, time-limited situation. Some predict that the range will be between $15-$30B.
“We are committed to acquiring TikTok subject to a complete security review and we fully appreciate the importance of addressing Mr Trump’s concerns.” ~ Microsoft Corporation
COMPANY DETAILS (Microsoft Corporation Inc.):
Microsoft Corporation is a multinational technology company which develops, manufactures, licenses, supports, and sells computer software, consumer electronics, personal computers, and related services.
Microsoft has a highly diversified business model. It’s core competency is to provide the operating system (Windows) and compatible software (Microsoft Office). Since the 1990s, it has increasingly diversified from the operating system market and has made a number of corporate acquisitions. In 2016 it acquired LinkedIn for $26.2B and in 2011 it acquired Skype for $8.5B.
The company also produces a wide range of other consumer and enterprise software for desktops, laptops, gaming consoles and servers, including internet search (Bing), the digital services market (through MSN), mixed reality (HoloLens), cloud computing (Azure), and software development (Visual Studio).
- Founded in: 1975
- Headquartered in: Redmond, Washington, United States
- CEO: Satya Nadella
- Number of Employees: 156,439
- Market Cap: $1.551T
- EV: $1.620T
- LTM Revenue: $143.015B
- LTM EBITDA: $65.259B
- EV/ LTM Revenue: 11.33x
- EV/ LTM EBITDA: 24.82x
COMPANY DETAILS (Beijing Byte Dance Telecommunications Co.):
ByteDance Ltd. is a Chinese multinational internet technology company which develops applications for smartphones. The company offers Douyin and TikTok for short-form mobile videos; Toutiao news; Xigua Video, a video application; Helo, a social media platform; Lark which combines essential collaboration tools in a single platform; and Babe, a news application.
- Founded in: 2012
- Headquartered in: Beijing, China
- CEO: Zhang Yiming
- Number of Employees: 90,000
- Market Cap: n/a
- EV: n/a
- 2019 Revenue: $17B
- 2019 EBITDA: $3B
- EV/ LTM Revenue: n/a
- EV/ LTM EBITDA: n/a
TikTok/Douyin is a video-sharing social networking service owned by ByteDance. It is used to create short music, lip-sync, dance, comedy and talent videos of 3 to 15 seconds. Initially Douyin was only available in China, but it became available worldwide in 2018 after ByteDance acquired Musical.ly for $1B.
TikTok offers in-app purchases of coins, starting at 100 for $0.99 and leveling up to 10,000 for $99.99. Users can give coins to their favorite creators, who can in turn exchange them for digital gifts. Agencies also start advertising on TikTok given its explosive popularity. The Chinese version of TikTok, Douyin, offers splash ads that can cost up to $150,000 for one day and newsfeed ads for about $4 per click. Brands like Pizza Hut have done such campaigns.
STRATEGIC RATIONALE
TIKTOK’S SURVIVAL
TikTok was deemed a risk to Americans’ personal data by the US national security review. As result, Donald Trump announced a ban by 15 September, unless the firm changed hands. Acquisition by Microsoft seems to be the only way to save TikTok from the crosshairs of regulators and the White House.
“Data will be bought and secured by a trusted US company and that will be a positive and acceptable outcome.” ~ Marco Rubio
SOCIAL MEDIA
Even though the purchase looks odd strategically, because up to date Microsoft has positioned itself as the leading software company with a mature, dull business, the acquisition enables Microsoft to enter the social media market with all guns blazing.
- TikTok has ~800M users
- It was a 1st most downloaded app on App Store in 2019
- Up until the end of 2019 it had 1.65B total downloads
“Microsoft has the resources, balance sheet, and experience to create a digital advertising ecosystem while also providing other synergies such as a cloud and search offering that could be used as well” ~Youssef Squali, Truist Securities
However, Microsoft has not been successful historically with deals focusing on consumers or advertising. They had little success at using advertising to monetise its online services, notably writing off more than $6B after failed advertising acquisition of aQuantive in 2012.
UNLIKELY RETALIATION
Microsoft has been on good terms with Beijing for over 28 years. China benefited significantly from the relationship with Microsoft. It served as an incubator for Chinese tech entrepreneurs, such as ByteDance’s founder, and 90% of computers there run on Windows. Thus, Microsoft is by far the most trusted US tech company. It also has the largest R&D center outside of the US in Beijing. Hence, retaliation against Microsoft seems unlikely.
RISKS AND UNCERTAINTIES
THE FIT
In 2016, when Microsoft acquired LinkedIn, the transaction was justified by the fact that the professional social network had more than 400m users and was established and profitable. It also was seen as natural extension of its focus on corporate clients. The same can’t be said about TikTok, where 70% of the audience is made up of 13–24 year olds and monetization barely begun. In fact, up to date ByteDance has used Chinese profits on promotion and content in order to grow its popularity and is not profitable in the US.
SEPARATION COMPLEXITY
It is difficult to say how exactly the American TikTok will be separated from its global operations. Currently, TikTok shares majority of its code with Douyin, Chinese sister app and Chinese engineers work on both platforms. ByteDance already spent some time splitting the app’s back-end operations and further separation in a short time may prove difficult to be successfull.
COMPETITION
Nor Facebook or Google are likely candidates to acquire TikTok as they would face anti-trust concerns. However, Facebook announced that it will launch a rival service, Instagram Reels soon. Also, given the complexity of separating TikTok from ByteDance, TikTok may require users to fill in a sharing agreement with ByteDance in order to access content from Asia and Europe.
The inconvenience of having to fill extra forms and tick the boxes may discourage some users from TikTok at least in the short-term. This would give Facebook an opportunity to attract new users at the cost of lost market share for TikTok.
