Notes

Microsoft's Reasons for Wanting TikTok to be Purchased

Multiple analysts have described the acquisition as a possible "coup" for Microsoft as a chance to buy one of the world's fastest-growing social media platforms at a moment when TikTok might be looking to strike an acquisition.



"This is a once in a lifetime deal of a decade with a price that could easily be consummated," Wedbush analyst Dan Ives wrote in a note to investors Monday.



Microsoft claims that it is in talks with Trump about buying TikTok from its Chinese owner



Microsoft would probably pay some part of $50 billion – the estimated value of TikTok as a separate business - in order to take over the management of the app's operations in the United States, Canada, Australia and New Zealand. The news of the potential deal was announced on Friday, and since the time of the closing bell on Thursday, Microsoft's market cap has increased to $80 billion, a indication that investors are enthusiastic about the idea.



Ives said he estimates TikTok's valuation could reach $200 billion within just few years "given the incredibly high user and engagement rate of TikTok." Rishi Jaluria, DA Davidson analyst, said that the potential growth of TikTok is exponentially attributed to the explosion of social media usage during the coronavirus pandemic.



A consumer-focused investment



Microsoft has been a major player in the corporate sector for several years. It has now shifted its focus from consumer-oriented offerings to better align its future with its cloud business. Therefore, the TikTok deal would mark an important step into the consumer space.



It could add a huge name to Microsoft's current consumer-oriented offerings which have seen mixed success. While LinkedIn has a growing community of influencers, and gaming products Xbox and Minecraft are well-known, Microsoft recently shut down its Mixer game streaming platform. Other Microsoft offerings aimed at consumers like Bing and the now-defunct Windows phone, have failed.



Jaluria stated that Microsoft is a company we all know, but that it's a very large enterprise software company. "TikTok could be a means to help Microsoft could increase their consumer presence, and consumer business."
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Although most people don’t think of dancing teens when they think about enterprise software, TikTok could help highlight Microsoft’s corporate prowess. If Microsoft can resolve concerns about the privacy policies for the app and host a fast expanding social network on its Azure cloud platform it will emphasize the security and geofencing capabilities.



It will work.



Despite a few failures in the past, many 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 a "slam-dunk" deal for the company. This was partly because the social media platform was given considerable autonomy.



"They haven't rebranded it. If you visit the site they don't use the name LinkedIn By Microsoft or something silly... And LinkedIn provides Microsoft such data that they can use," Jaluria stated, saying that a similar method could be applied to TikTok.



He added, "As long they don't alter the core product and let it run as (the app's leadership) would like it to, I believe it will be successful acquisition."



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But, there are risks.



In the course of the agreement, Microsoft committed to ensuring American users' personal information is stored in the United States. Microsoft and TikTok parent ByteDance must approve the agreement. They could also be required to pay some money to the US Treasury. In the current state of low relations between China and the US, the purchase of an app developed in China could place Microsoft under greater scrutiny.



Microsoft has largely avoided the recent waves of regulatory scrutiny directed at its Big Tech peers, but this could change if it acquires a controversial social networking app created in China with a massive user base. Peter Navarro, White House trade advisor has suggested that Microsoft "divest its Chinese holdings", in order to be able to purchase TikTok. He spoke to CNN's Jim Scuitto Monday.



"I don't think there will be a lot of antitrust scrutiny of this deal, since Microsoft doesn't have any footprint in social media used by consumers," Jaluria said. "But a post-TikTok Microsoft could find itself in the crosshairs because they'd have an operation that is leveraging data. That's the issue people have worried about with Facebook and Google making use of data to promote advertising."



And then there's the question of whether TikTok's booming success is actually sustainable.



If TikTok proves to be the next Instagram (and is capable of surviving competition from a Facebook-owned rival that is due to launch soon) the deal will be a clear win for Wedbush, Ives said.



He suggested that TikTok could be the next Snapchat and has a lot of user growth and monetization problems in the future, so this acquisition could affect the value in the future, especially considering the enormous competition from Facebook.


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