ByteDance is poised to miss US deadline for TikTok sale

Bloomberg | Updated on September 11, 2020

In bid to delay the sale, Chinese officials tell ByteDance to submit proposal with detailed information for approval; says review will be substantial and take time

ByteDance Ltd is increasingly likely to miss a Trump administration deadline for the sale of its TikTok US operations after new Chinese regulations complicated negotiations with bidders Microsoft Corp and Oracle Corp, according to people familiar with the matter.

ByteDance probably needs beyond the US executive order ban on September 20 to nail down an agreement with either party because of the regulatory review, said the people, asking not to be identified because the matter is private. In preliminary talks with Chinese officials, ByteDance has been told any proposal must be submitted for approval with detailed information about technical and financial issues, and the review will be substantial and take time, one of the people said. The officials haven’t been willing to give specific guidance on what kind of deal would work, the person said.

Donald Trump said Thursday in the US there would be no extension of the deadline.

Microsoft and Oracle, which had submitted proposals before the Chinese regulations hit, both continue to be interested in buying the US arm of the hit video app and have not been dissuaded by Beijing’s involvement, the people said. The bidders have asked ByteDance to get as much clarity as possible from Beijing on the new regulations, which prohibit the export of certain artificial intelligence technologies that TikTok uses, they said.

The parties are still racing to present a preliminary deal to the White House before this month’s deadline, though no agreement could be finalised before Beijing’s sign-off. It’s also possible that ByteDance pulls out of a sale altogether if it determines it can’t satisfy both governments, the bidders and its own shareholders.

A company representative offered no immediate comment.

ByteDance founder Zhang Yiming has been caught in a clash between the world’s two pre-eminent powers. The serial entrepreneur has been reluctant to give up US TikTok from the start because he sees the business as a viable long-term competitor to Facebook Inc and Google. He came under pressure to cede control when the Trump administration said it would ban the app and his own venture investors pressed for a sale to salvage some value from the operation.

The Trump administration had been considering whether to give more time, but the president’s comments appeared to put an end to such deliberation.

“Well either close up TikTok in this country for security reasons, or it will be sold,” he told reporters on Thursday before boarding the presidential aircraft for a campaign trip to Michigan. “There will be no extension of the TikTok deadline.”

The specific deadline for ByteDance to act remains an open question in the US due to a confusing series of Trump statements and orders. While Trump has said he wants a deal by September 15, the ban on TikTok’s US operations that he signed last month in a bid to force a sale requires the company to act by September 20. A separate decision by the Committee on Foreign Investment in the United States, or CFIUS, requires a sale by mid-November.

ByteDance has sued in the US to block the executive order ban, arguing that putting it out of business without adequate notice and a fair chance to respond deprives it of its due-process rights in violation of the Constitution. The Beijing-based company has also denied its app represents a security threat and said no data from American users is shared with China.

In negotiations earlier this year, ByteDance had attempted to work out a US sale that would allow it to retain a substantial interest in the American operations, but the Trump administration has pushed back on that idea. Zhang would still like a small slice of the operation, the people said. But Microsoft and its partner in the deal, Walmart Inc, want full ownership of the business, one person said, while Oracle’s stance isn’t clear.

Analysts and bankers have estimated TikTok’s US business is worth at least $20 billion, although the price would vary widely depending on what is included with the sale. The specific offers from Microsoft, which is teaming up with Walmart Inc, and Oracle, which has won support from venture backers such as Sequoia Capital, could not be determined.

China made its 11th-hour entry into the TikTok process the last weekend of August, just as ByteDance had two offers in hand and planned to review them in hopes of making a final decision by the close of Sunday, a different person said. Beijing’s move blindsided the company, this person said.

Without any discussion or public announcement, China posted notification of new restrictions on the export of artificial intelligence technologies, including speech recognition and techniques for personalising content. The aim of the rules is not necessarily to block a sale of the US operations, but to ensure Beijing is actively involved and to slow down the process, one person said. The review may well push finalisation of any agreement beyond the US elections in November, the person said.

TikTok’s algorithms are not a big sticking point for the bidders, the second person said. Both Microsoft and Oracle have the technical chops to build their own algorithms and would get data to fine-tune them, the person said.

ByteDance’s regulatory team and deal negotiators have discussed whether it’s still possible to craft a sale that can win approval from both governments, an acquirer, venture investors and ByteDance itself.

Zhang is still operating from a position of strength. Privately-held ByteDance is already worth $140 billion, according to start-up tracker CB Insights, and is said to have generated more than $3 billion of net profit on more than $17 billion of revenue in 2019.

Investment bankers have begun pitching Zhang’s team on going public in China or Hong Kong, even amid growing scrutiny in the US, and demand for initial public offerings from technology companies in the market is surging. Zhang stands to make billions no matter what happens with Trump and TikTok US.

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Published on September 11, 2020
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