TikTok's Potential Acquisition By Oracle and Walmart
The dispute over data between the US and China
A major deal is being currently negotiated in the United States concerning the acquisition of the control of the U.S. 's operations of TikTok, a privately held Chinese technology company. The deal has been raising questions on both sides of the dispute, gathering reactions from both Chinese and American politicians, as well as private stakeholders. Given the importance of the dispute, it will be the theme of this week's financial report on M&A transactions.
TikTok is a social media application designed to record and share short videos that has been growing significantly in the last years, especially among the youth. TikTok was created by ByteDance, a Chinese technology company founded in 2012 by Zhang Yiming, currently considered one of the wealthiest people in China, with a private net worth of over 15 billion dollars. According to PitchBook, ByteDance is today the most valuable privately held company in the world, being worth $75 billion U.S. dollars. The app was launched in 2016 and is now the number one non-gaming app in the Apple Store, totalling over one billion downloads. In an interview to South China Morning Post, Zhang stated that he wants the app to keep growing abroad and become "as borderless as Google". The dispute that will be explored in this article concerning TikTok is considered to be one of the main challenges to Zhang's wish to keep expanding its business worldwide.
It is known that the current misunderstandings between the United States and China have implied worldwide consequences in several aspects. The so called "trade war" has been a fundamental mark of the relationship between the two countries and has been escalating during the coronavirus situation. Currently, such conflict is leading the American president Donald Trump to threaten the ban of TikTok in the United States, a request that was overruled by the U.S. district court on the basis that banning the app would infringe the broadcast rights of American citizens. But what are the reasons for such a ban to happen? The President alleges that, through TikTok, Beijing would have access to Americans' personal data, especially childrens' data without parental consent. In response, ByteDance stated that its data centers are located entirely outside China and none of such data is subject to Chinese law.
Given this scenario, the United States President attempted to force a quick sale of TikTok, in which Oracle and Walmart would own a combined 20% stake of TikTok Global, a new company which would be headquartered in the United States and would operate the TikTok app. Four of the five board members of the new company would be Americans, being the fifth member ByteDance and TikTok's founder Zhang Yiming. The CEO of Bytedance was called a traitor in the Chinese social media given his negotiations with the American companies, which makes clear the tensions between the two sides of the deal.
Controversial Issues at Stake: Who will have the control?
There are a few issues concerning this deal that will be now explained in a clearer manner. The first one encompasses Trump's statement that the app would be entirely controlled by Walmart and Oracle, while the structure clearly indicates that such control would not occur. Also, Oracle's executive vice president Ken Glueck stated that "Americans will be the majority and ByteDance will have no ownership in TikTok Global", which is inconsistent with the deal's structure. On the other hand, ByteDance claimed that TikTok would be "a 100% owned subsidiary of ByteDance". Therefore, there is a clear confusion between each party's expectations. However, Trump claimed that he would not approve the deal in case Walmart and Oracle do not own the controlling interest.
According to a person familiar with the deal, TikTok Global will be partially owned by ByteDance's international and Chinese investors, with ByteDance holding zero of the new company. Oracle and Walmart would represent 53% of ownership, while ByteDance's Chinese and international investors would hold 36% and 11% of ownership, respectively.
Another issue in this deal concerns the app's source code and algorithm regarding user's personal data. Oracle would be responsible for reviewing such aspects before users are able to use the app, however the deal would not involve the transfer of its algorithms and technologies. Nevertheless, worries with ByteDance sending back user data to China are highlighted, being such a sensible topic to the United States. As mentioned above, the fact that the app gathers and distributes mainly young people's images and statements makes the concern even more intense in the U.S. TikTok was obliged to pay $5.7 million in February to the U.S. Federal Trade Commission on the basis that it had violated the Children's Online Privacy Protection Act. The payment of the fee was the beginning of a months-long dispute between the Trump administration and the ByteDance board.
Also, Trump's statement that the deal would include a $5 billion fund for the United States education was previously unknown by ByteDance. However, Oracle and Walmart did not mention an education fund in their press release, but rather an amount of over $5 billion in new tax dollars to the U.S. Treasury, being such an estimation of the corporate income tax and other operating taxes that TikTok will need to pay for its business development in the next few years.
Besides the national control of the data being gathered by TikTok, the deal raises the question of what would be the advantages for both Oracle and Walmart on the acquisition negotiation, subsequently explored.
Potential Benefits for Oracle and Walmart's Interests
Oracle is a California-based IT infrastructure company known for its dominant role in the database software and technology industry. In fact, with more than 40 years in the market, it is the creator of one of the most widely used programming languages: Java. In the company’s portfolio, there is no product that deals directly with the public who buys products or services, and the interest in TikTok comes across the idea of diversifying its revenue stream in order to future expand its cloud business, which is projected to become a trillion-dollar market within the future decade.
However, the cloud business is dominated by other market players such as Amazon’s AWS and Microsoft. In fact, AWS is the current cloud service provider for TikTok in the United States. Having also the case of Google Cloud, which has been struggling to break into the market as one of the leaders, Oracle will have to tackle a bigger difficulty as it comes from further behind. Nonetheless, as TikTok’s technology partner and sole cloud infrastructure provider, Oracle will host data from approximately 100 million monthly active users in the U.S. This would benefit its digital advertising business by giving the company potentially new revenues from monetizing the app’s user data.
Oracle’s idea of entering the market strongly is to get big customers to serve as a proof of reference of its cloud structure. Earlier this year, Oracle and Zoom signed a deal, increasing the company’s presence in the sector. Adding TikTok would further give Oracle a boost. Although it is yet to happen, a potential deal between TikTok and Oracle would confirm the synergies of positioning Oracle as a top cloud player.
When it comes to the interest and benefits to Walmart, it touches mostly the online retail segment. Given its rapidly growing and worldwide expansion, TikTok had been making experiments with e-commerce features. In 2019, the app began to allow more relevant users to add links to e-commerce websites so people can buy the products shown in their videos. A Walmart representative said to CNET that the participation on the control of U.S. TikTok operations "will bring its omnichannel retail capabilities" to the TikTok app.
Having cited what would be the potential benefits of the deal for both Oracle and Walmart, we should assess what would be TikTok's potential benefits.
Potential Benefits for TikTok's Interests
TikTok's, represented by ByteDance, interests on the deal rely on the fact that it would help the company keep its presence in the United States. The app is currently used by 50 million U.S. citizens every day. Losing its presence in the American market would lead to a great loss for the company, considering that there are 800 million users worldwide (a 6.25% loss in customers is ought to be a high number, even though TikTok's reach is constantly growing).
Trump's Take on the Deal
Analyzing the political side of the deal, Trump can be said to be providing his best efforts for the deal to happen while having the opportunity to simply ban TikTok in the United States. He is doing so because banning the app in the country could imply the loss of several important votes in the presidential elections to come. Many voters, mainly youngsters, are frequent users of the app and may change their votes if such ban takes place. However, given the current scenario, it is hard to believe that a deal might take place prior to the presidential elections.
Nevertheless, he cannot accept the deal in any condition due to the trade war with China. Granting China a majority control of the new company TikTok Global would imply in letting all previous efforts concerning such political disputes fade away. As such deal also encompass power disputes between both nations, Trump could not do this with his country.
Beijing's Take on the Deal
Analyzing now from the other side, as the deal further develops in the U.S. scenario, Beijing comes up to show its mind on what they call the "bullying" of Trump's administration, which clearly stated that it will not support the deal unless the majority control is not at ByteDance's hand. A Chinese paper affirmed that "China will not yield to U.S. intimidation and will not accept an unequal treaty that targets Chinese companies". But, besides finding the U.S. government approach quite violent, what is the actual voice of the Chinese government when it comes to the control of TikTok?
According to ByteDance, the deal will indeed require approval from the Chinese government, since Beijing recently added artificial intelligence technologies to its export control list last month. Besides that, in the same tone as the U.S. headquarters, the Xi-Jinping administration worries about the consequence of the deal for Chinese national security.
ByteDance's CEO shares the view of the Chinese media, internally saying to his employees that the true aim of Trump's impositions on TikTok is to ban the video app. Zhang also stated that he finds the American's president view unreasonable.
Closing Remarks
As shown throughout the present article, the deal concerning the acquisition of American operations of the TikTok app surrounds several political and economic tensions between Trump's administration and China's government. The dispute arises mainly from the control of the data produced by the American youth using the app, however such deal deserves a greater highlight due to its political context in addition to solely the economic point of view, which is not a common condition in the existent M&A deals.