Notes

Microsoft's Desire to Purchase TikTok

Numerous analysts have characterized the acquisition of TikTok as a possible "coup". This is an opportunity to grab one of the fastest growing social media platforms in the world at a time TikTok might be in desperate need of a deal.



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



Microsoft claims that it is talking 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 stand-alone business - to acquire control of TikTok's operations in United States, Canada, Australia and New Zealand. The news of the deal was announced on Friday, and since the close of business on Thursday, Microsoft's market capitalization has increased by $80 billion, a indication that investors are in love with the idea.



Ives stated that TikTok's valuation could be $200 billion within the next few years, "given the steep user-engagement trend of TikTok." Rishi Jaluria, DA Davidson analyst, acknowledged that TikTok's potential growth is exponentially attributed to the rapid growth in social media usage during the coronavirus pandemic.



A consumer-focused investment



Microsoft has been a major player in the corporate sector for a number of years. It has now changed its focus from consumer-oriented offerings to better align its future with its cloud business. Thus, the TikTok deal will be a significant push into the consumer space.



It would add a big name to Microsoft's current products geared towards the consumer which have seen mixed results. While LinkedIn has a growing network of influencers, and gaming products Xbox and Minecraft are well-known, Microsoft recently shut down its Mixer game streaming platform. Other Microsoft products targeted at consumers, such as Bing and the now defunct Windows phone, have not been a success.



Jaluria stated that Microsoft is a company that we all knowabout, however, it's a large enterprise software company. "TikTok could be a way that Microsoft can grow their consumer presence, and even their consumer business."



While most people don't think of dancing teenagers when they think about enterprise software, TikTok could help highlight Microsoft's expertise in the corporate world. 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 failed bets made by the company in the past, a number of acquisitions made under Nadella's reign at Microsoft have proven highly successful.



Jaluria said that Microsoft's acquisition of LinkedIn for $26 billion in 2016 was a "slam-dunk" deal for the company. This was partly because the social media platform was allowed significant autonomy.



"They haven't rebranded ityet, in the case of the website, they don't call it LinkedIn by Microsoft or something similar to that ... And LinkedIn provides Microsoft plenty of information that they can benefit from," Jaluria said, noting that a similar strategy could work with TikTok.



He stated, "As long they don't alter the basic product and let it run the way that (the app's leadership) prefers I believe it will be a successful acquisition."



How do TikTok users feel about Trump's potential ban in the US



However, there are risks, too.



Microsoft has agreed to store American users' private data in the United States as part of the agreement. DEEPSPACEII Microsoft and TikTok parent ByteDance will require US officials' approval on the deal, and could be required to make a payment to the US Treasury. And acquiring an app created in China could trigger new scrutiny on Microsoft at a time relations between the US and China, particularly over technology, are at a low.



Microsoft has escaped much of the regulatory scrutiny that has been directed at its Big Tech peers. However this could change when it buys an unpopular social media app developed in China that has a significant user base. Peter Navarro, White House trade advisor has suggested that Microsoft "divest its Chinese holdings", in order for it to be allowed to purchase TikTok. He spoke with CNN's Jim Scuitto Monday.



Jaluria said that "I think there won't be any significant antitrust scrutiny of this deal, since Microsoft doesn’t have any footprint on consumer social media." "But in the event of a post-TikTok deal, Microsoft could find itself in the crosshairs because they would have a business where they're leveraging data. There has been some concern about the use of data for advertising on Facebook and Google.



Then there's the issue regarding whether TikTok is actually sustainable.



Wedbush's Ives said that should TikTok proves to be the next Instagram (and can withstand competition coming soon from a Facebook-owned competitor) it will be a clear win.



"However should we proceed? If TikTok is the next Snapchat and faces a myriad of monetization and user growth issues in the future, then this acquisition could reduce the valuation over time given the massive competition from Facebook and other companies," he said.


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