Microsoft may have sabotaged TikTok deal by upsetting owner

Microsoft may have unintentionally sabotaged its TikTok deal by upsetting owner when it called the app ‘a security risk it could fix’

  • TikTok backed out of talks to sell its US operations to software giant Microsoft 
  • China and Beijing-based investors pressured ByteDance not to sell 
  • ByteDance CEO Zhang Yiming was upset by comments from Microsoft official
  • Microsoft said that TikTok posed a ‘security risk’ that could be ‘fixed’
  • US government has alleged TikTok user data could be obtained by China
  • Trump administration threatened to ban app unless it was sold by September 20 
  • TikTok has instead opted to enter talks with Oracle on a partnership 

The CEO of TikTok’s parent company was reportedly upset Microsoft said the social media platform posed a ‘security risk’ that it could ‘fix’ before it backed out of talks with the software giant over a sale of the app in favor of a partnership with Oracle.

ByteDance founder and CEO Zhang Yiming’s decision to drop his pursuit of a sale of TikTok’s US operations to Microsoft in favor of a partnership with Oracle was the culmination of weeks of pressure from China’s government and the Beijing-based firm’s investors, according to people familiar with the deliberations.

China’s opposition to a forced sale of TikTok, as well as concerns by major ByteDance backers such as Sequoia and General Atlantic over the financial hit of selling the popular short-video app in the United States for less than what it is worth, led Zhang to opt for the sale of only a stake to Oracle, rather than an outright divestment, the sources said.

It is a risky strategy. 

President Donald Trump has made it clear he wants to see an outright sale of TikTok to a US technology company, amid concerns by national security officials that US user data could be passed on to China’s Communist Party government. 

Zhang Yiming (left), the founder and CEO of TikTok’s parent company ByteDance, was reportedly upset when prospective TikTok buyer Microsoft (led by CEO Satya Nadella, right) called the app a ‘security risk’ that can be ‘fixed’

TikTok spurned Microsoft, instead opting to enter negotiations with Oracle on a partnership

He has threatened to ban TikTok in the United States as early as September 20 if ByteDance does not comply.

Microsoft executives grew frustrated over the course of the past week as ByteDance became unresponsive to the Redmond, Washington-based company’s $20billion-plus bid for TikTok’s US business, three of the sources said. 

The bid also allowed for future payments based on TikTok’s performance, one of the sources added.

This offer fell short of ByteDance investors’ expectations, the sources said. 

In arguing for its bid with the Trump administration and US lawmakers, Microsoft upset Zhang, because it referred to TikTok as a security risk it could fix, the sources added. 

ByteDance has maintained that its ownership of TikTok presents no such risk.

All the while, Sequoia and General Atlantic were working with Oracle on an alternative deal that would avert an outright sale, according to the sources. 

On Sunday, Microsoft announced ByteDance had rejected its bid to acquire TikTok’s US business.

This account of how ByteDance picked Oracle as its partner for the TikTok deal is based on interviews with six people with knowledge of the discussions who requested anonymity to disclose details. 

ByteDance and Microsoft did not immediately respond to requests for comment.

Oracle declined to comment and pointed to its statement earlier on Monday that confirmed its participation in the proposed deal. General Atlantic and Sequoia also declined to comment.

ByteDance has worked feverishly in the last few days on a deal proposal that would allow the Chinese company to retain a minority stake in TikTok while addressing US security concerns, the sources said. 

Zhang is referring to this deal in discussions with other ByteDance executives as a restructuring, the sources said. One of the sources called the proposed arrangement akin to a joint venture.

Oracle is in negotiations to take a sizable minority stake in TikTok’s US business, with the remainder owned by some large ByteDance investors, including General Atlantic and Sequoia, the sources said. 

Oracle would also take over the management of TikTok’s user data and be responsible for its safety, according to the sources.

Oracle is in negotiations to take a sizable minority stake in TikTok’s US business, with the remainder owned by some large ByteDance investors, including General Atlantic and Sequoia, it has been reported. Oracle CEO Mark Hurd is seen above in October 2017

It is not clear what valuation this deal would infer on TikTok’s US business, which has as many as 100 million users.

The proposal calls for the Committee on Foreign Investment in the United States (CFIUS), the US government panel overseeing the deal talks, to approve board directors at TikTok, as well as relationships with major vendors, the sources added.

The arrangements would be similar to those CFIUS put in place when Lenovo acquired IBM’s personal computer business in 2005 and SoftBank Group Corp acquired US wireless carrier Sprint in 2013, according to the sources.

ByteDance also plans to argue that CFIUS’s approval two years ago of China Oceanwide Holdings Group Co Ltd’s purchase of US insurer Genworth Financial Inc offers a precedent for its proposal with Oracle, Reuters reported on Sunday.

In that deal, China Oceanwide agreed to use a US-based, third-party service to manage Genworth’s US policyholder data. 

ByteDance will argue a similar arrangement with Oracle can safeguard TikTok’s US user data.

ByteDance has also made other concessions to appeal to Trump, the sources said. 

It has offered for TikTok to create 25,000 US jobs, up from a little over 1,000 employees in the United States currently, according to the sources.

ByteDance is hoping that Oracle founder Larry Ellison’s fundraising for Trump, as well as Oracle CEO Safra Catz’s backing of Trump’s transition team four years ago, will also boost its chances, the sources said.

So far, the White House has been noncommittal in its discussions with ByteDance, and it remains unclear whether the proposed deal will go ahead, the sources said.

On Monday, Treasury Secretary Steven Mnuchin said CFIUS would review the deal this week and make a recommendation to Trump.

The White House did not respond to a request for comment.

Reuters reported last week that China’s government would rather see TikTok shut down in the United States than see it be part of a forced sale. 

It would need to approve the transfer of TikTok’s algorithm to a foreign buyer.

The proposed deal with Oracle would not require ByteDance to apply to Chinese authorities for an export license for TikTok’s algorithm, the sources said.

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