U.S. Secretary of State Mike Pompeo prepares to testify to a Senate committee in Washington on July 30, 2020.POOL/Reuters
A potential shotgun wedding to Microsoft Corp for TikTok’s U.S. operations provoked an outcry on Chinese social media as well as criticism from a prominent Chinese investor in TikTok owner ByteDance.
The U.S. tech giant formally declared its interest on Sunday after President Donald Trump reversed course on a planned ban of Tiktok and gave the two firms to 45 days to come to a deal.
The proposed acquisition of parts of TikTok, which boasts 100 million U.S. users, would offer Microsoft a rare opportunity to become a major competitor to social media giants such as Facebook Inc and Snap Inc.
Microsoft, which also owns professional social media network LinkedIn, is also seeking to buy TikTok’s Canadian, Australian and New Zealand interests.
ByteDance has not publicly confirmed the news. But in an internal letter to staff on Monday seen by Reuters, the company’s founder and CEO Zhang Yiming said the firm had started talks with a tech company that was not identified.
The letter also said ByteDance did not agree with the stance taken by the Committee on Foreign Investment in the United States (CFIUS) that it must fully divest TikTok’s U.S. operations.
“We disagree with this CFIUS conclusion,” the letter said but added: “...we understand the decision in the current macro environment.”
But clinching a deal - potentially worth billions of dollars and a lightning rod for crumbling U.S-China relations - that will satisfy all parties will be a tall order.
“A forced deal under Washington’s shotgun could open up for endless litigations if it should result (in) an unfavorable outcome to existing private shareholders,” said Fred Hu, chairman of Primavera Capital Group, an investor in ByteDance and one of China’s best known private equity groups.
Hu said Microsoft was a credible buyer but questioned how selling large parts of TikTok’s operations at such an early stage of its growth could ever be a good deal for ByteDance.
“It absolutely makes no sense. Bytedance is an innocent victim of the mad politics and mad geopolitics. It is a sad outcome for Bytedance, for entrepreneurial capitalism, and for the future of global commerce,” he said.
Tech bankers in Asia said investment banks working on the deal would have to be careful not to antagonize Trump.
“This is not a standard M&A situation...this is hard to predict,” said one senior banker with a U.S bank in Hong Kong, saying that it would be a question of how to structure a deal in a way that would keep Washington happy.
ByteDance did not immediately respond to requests for comment.
The Chinese government declined to comment specifically on the Washington’s move to force a sale of TikTok’s U.S. operations.
The United States has been “stretching the concept of national security”, presuming that companies are guilty without evidence, China’s foreign ministry spokesman Wang Wenbin told a briefing after being asked about U.S. actions against Chinese software companies.
Trump had said on Friday he was planning a ban amid concerns that its Chinese ownership represents a national security risk because of the personal data it handles.
He only agreed to allow Microsoft to negotiate a deal if it could secure a deal in 45 days, three people familiar with the matter said on Sunday.
It was not immediately clear what changed Mr. Trump’s mind. Several prominent Republican lawmakers put out statements in the last two days urging him to back a sale of TikTok to Microsoft.
The negotiations between ByteDance and Microsoft will be overseen by the Committee on Foreign Investment in the United States, a U.S. government panel that has the right to block any agreement, according to the sources, who requested anonymity ahead of a White House announcement.
Earlier Sunday, Secretary of State Mike Pompeo said U.S. President Donald Trump plans to take action on a what he sees as a broad array of national security risks presented by software connected to the Chinese Communist Party.
“These Chinese software companies doing business in the United States, whether it’s TikTok or WeChat — there are countless more ... are feeding data directly to the Chinese Communist Party, their national security apparatus,” Mr. Pompeo said on Fox News Channel’s Sunday Morning Futures.
“Could be their facial recognition patterns. It could be information about their residence, their phone numbers, their friends, who they’re connected to. Those – those are the issues that President Trump has made clear we’re going to take care of,” he said.
TikTok’s U.S. user data is stored in the U.S., with strict controls on employee access, and its biggest investors come from the U.S., the company said Sunday. “We are committed to protecting our users’ privacy and safety as we continue working to bring joy to families and meaningful careers to those who create on our platform,” a TikTok spokesperson said.
Mr. Trump had said on Friday that he would soon ban TikTok in the United States. A federal committee is reviewing whether that’s possible, and its members agree that TikTok cannot remain in the U.S. in its current form, because it “risks sending back information on 100 million Americans,” said Treasury Secretary Steven Mnuchin.
“We all agree there has to be a change ... everybody agrees it can’t exist as it does,” Mr. Mnuchin said Sunday on ABC’s This Week.
As speculation grew over a ban or sale of the social media’s U.S. business, TikTok posted a video on Saturday saying: “We’re not planning on going anywhere.”
TikTok’s catchy videos and ease of use has made it popular, and it says it has tens of millions of users in the U.S. and hundreds of millions globally. Its parent company, Bytedance Ltd., launched TikTok in 2017. It bought Musical.ly, a video service popular with teens in the U.S. and Europe, and combined the two. It has a similar service, Douyin, for users in China.
But TikTok’s Chinese ownership has raised concern about the potential for sharing user data with Chinese officials as well as censorship of videos critical of the Chinese government. TikTok says it does not censor videos and it would not give the Chinese government access to U.S. user data.
“Microsoft fully appreciates the importance of addressing the President’s concerns. It is committed to acquiring TikTok subject to a complete security review and providing proper economic benefits to the United States, including the United States Treasury,” Microsoft said in a statement.
ByteDance and the White House did not immediately respond to requests for comment.
Microsoft may invite other American investors to acquire minority stakes in TikTok, the company added. About 70% of ByteDance investors come from the United States.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.