Notes

Microsoft's Reasons for Wanting TikTok to be Purchased

Numerous analysts have described the acquisition of TikTok as a potential "coup". This is an opportunity to grab one of the fastest growing social media platforms in a moment when TikTok could be in desperate need of an acquisition.



"This is a once of a lifetime opportunity that comes with the potential to easily be consummated," Dan Ives, Wedbush analyst who wrote Monday in a note to investors.



Microsoft claims it is still in talks with Trump over TikTok's purchase by its Chinese owner



Microsoft will likely pay a portion of $50 billion which is the estimated value of TikTok as an independent business, to buy the app's operations across the United States of America, Canada, Australia, New Zealand and Australia. The news of the potential deal was announced on Friday, and since the time of the closing bell on Thursday, the market cap of Microsoft has increased to $80 billion, a sign that investors like the idea.



Ives said he estimates that TikTok's valuation could be as high as $200 billion in just few years "given the steep user and engagement growth of TikTok." DA Davidson analyst Rishi Jaluria agreed, saying TikTok is poised to grow "exponentially," especially because social media usage has exploded during the coronavirus pandemic.



A consumer-focused investment



Microsoft is a longtime leader in the corporate space that has moved away from products that cater to consumers and linked its future to the success of its cloud business. Thus, the TikTok deal could be a significant push into the consumer space.



It would add a major name to Microsoft's current consumer-oriented offerings, which have had mixed results. While LinkedIn has a growing network of influencers and gaming platforms Xbox and Minecraft are popular, Microsoft recently shut down its Mixer game streaming platform. Other Microsoft products targeted at consumers, like Bing and the now defunct Windows Phone haven't been able to achieve success.



"Microsoft is a company that we all know, however, it's an enterprise software company," Jaluria said. "TikTok could be a possibility for Microsoft to expand their presence in the consumer market and their business."



Although the majority of people don't think of dancing teenagers when they think about enterprise software, TikTok could help highlight Microsoft’s corporate prowess. If Microsoft can address concerns regarding the app’s data privacy policies and host a rapidly expanding social network on its Azure cloud platform it will focus on security and geofencing capabilities.



It will work.



Despite some flops in the past, a lot of the acquisitions made by Nadella during his time at Microsoft have been extremely successful.



Jaluria stated that Microsoft's purchase of LinkedIn for $26 billion in 2016 was an "slam-dunk" deal for the company. This was partly because the social media platform was granted significant autonomy.



"They haven’t rebranded it. If you look at the website it doesn't say LinkedIn By Microsoft or something silly... And LinkedIn provides Microsoft such data that they can use," Jaluria stated, adding that a similar approach could be used with TikTok.



"As long that they don't alter the core product, and let it run how (the app's) leadership wants it to, I think it will be a profitable acquisition," he said.



How TikTok users are reacting to Trump's possible US ban



But, there are dangers.



In the course of the agreement, Microsoft committed to ensuring American users' private data is stored in the United States. Microsoft and TikTok parent ByteDance must agree to the agreement. They could also be required to make some payment to the US Treasury. In a period of deteriorating US-China relations, the acquisition of an app created in China could bring Microsoft under greater scrutiny.



Microsoft has been able to avoid the scrutiny of regulators that has been directed at its Big Tech peers. However this could change if it purchases a controversial social-media app made in China that has a significant user base. Peter Navarro, White House trade advisor has suggested that Microsoft "divest its Chinese holdings" in order to be permitted to purchase TikTok. He spoke with CNN's Jim Scuitto Monday.



"I do not believe there will be significant antitrust scrutiny on this deal, since Microsoft doesn't have any footprint in consumer social media," Jaluria said. "But a post-TikTok Microsoft could find itself in the crosshairs because they'd have an operation that is leveraging data. People have been concerned about the use of data to create advertising on Facebook and Google.



Then there's the issue of whether the burgeoning success of TikTok is really sustainable.



Wedbush's Ives said that if TikTok proves to be the next Instagram (and can withstand competition from a Facebook-owned competitor) the deal will be a clear win.
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He suggested that TikTok could be the next Snapchat and has plenty of user growth and monetization problems in the future, so this acquisition could impact valuation in the long run, due to the huge competition from Facebook.


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