- Microsoft announced TikTok parent company ByteDance rejected its bid to acquire the app's US operations.
- ByteDance stuck a deal to make Oracle its "trusted technology provider" in the US, in a bid that still has to be reviewed by the US Treasury Department.
- Microsoft was first on the scene when it appeared ByteDance needed a US buyer or partner for TikTok to resolve a national security review of its ownership of the app.
- Microsoft's discussions with ByteDance included many different potential scenarios, a person familiar with the matter said, but the talks were ultimately complicated by external factors, culminating in the rejection of Microsoft's bid.
- What is clear from the ordeal is that Microsoft is looking for its next big play.
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Microsoft lost its bid to acquire TikTok's US operations after parent company ByteDance stuck a deal to make Oracle its "trusted technology provider" in the US, bringing a months-long battle with the Trump administration closer to a conclusion.
Oracle has submitted a proposal to the US Treasury Department for approval, and details of the deal are still coming into focus. While the unpredictable nature of the TikTok deal — and the need for any bid to overcome lawmakers' national security concerns around the app — makes it difficult to rule out any outcome, it appears Microsoft's quest to acquire a stake in the wildly popular short-video app has come to an end.
As has been widely reported, the saga of $1.6 trillion Microsoft and TikTok was unusual and constantly changing — with TikTok at the center of tensions between the United States and China, the normal deal process was supplanted by a need to come up with a solution that would satisfy both governments and the app's China-based owner Bytedance alike.
Microsoft was first on the scene when ByteDance needed to partner with a US technology company to help resolve a national security review into its ownership of the app, and is said to have began with a deal that would see the tech titan hold a minority stake in exchange for using the Microsoft Azure cloud.
As political pressures mounted, however, the potential deal became less about the traditional terms of an acquisition, such as price, with Microsoft and TikTok instead exploring multiple potential arrangements that could help a bid pass muster with the White House, per a person familiar with the matter whose identity is known to Business Insider.
Wedbush Securities analyst Dan Ives believes the nail in the coffin for Microsoft's deal was when the Chinese government revised export rules to give it approval over sales of technologies including code for making personalized recommendations, such as TikTok's prized video feed algorithm.
"Microsoft was only going to acquire TikTok if the algorithm and the source code was part of the deal," Ives told Business Insider. "Once the export rules changed, it was essentially a poison pill for the deal. [Microsoft CEO Satya] Nadella never wanted that deal."
Where does Microsoft go from here?
Microsoft's TikTok bid came as a surprise because it seemed to have little to do with the company's existing business, which largely focuses on cloud computing and enterprise software.
There are many theories about why Microsoft wanted to acquire TikTok, but little is known about what exactly Microsoft planned to do with the app and where it would have fit into the company.
What is clear from the ordeal, Ives said, is that Microsoft is looking for its next big play.
Microsoft's enterprise software and cloud computing businesses are performing well, and while the company has taken recent steps to cut its losses in some areas and prioritize its strengths, the TikTok bid shows Microsoft has an appetite for a consumer acquisition.
"Microsoft has significant deal prospects on the horizon," Ives said. "There could always be more surprises around the corner."
Moor Insights & Strategy analyst Patrick Moorhead thinks Microsoft should stick to enterprise software.
"Microsoft dodged a bullet by not getting to buy TikTok," Moorhead told Business Insider. "Microsoft has been killing it in the marketplace not by consumer services, but rather focusing on [business to business] and productivity use cases."
Futurum Research analyst Daniel Newman said losing out on the deal isn't such a big loss for Microsoft. The company already has diverse, successful businesses its Azure cloud computing business and Teams chat app, plus its Surface hardware lineup and its increasingly popular business applications and products for developers.
"Microsoft can certainly look at and/or pursue deals like TikTok as potential opportunities to scale or springboard into new businesses, but I don't believe that any of these deals are 'must win' for the company," Newman told Business Insider. "Winning TikTok could have opened some new doors, but Microsoft will continue on its path, which has proven fruitful and I don't see this being something Microsoft spends a whole lot of time looking back at."
Nucleus Research analyst Daniel Elman said TikTok was a "natural avenue to pursue" for Microsoft, given TikTok's 100 million-plus users and Microsoft's position as one of the only technology companies with the infrastructure to support such an application and user base, plus the company's connections to the US government through its award of a $10 billion Pentagon cloud computing contract.
Newman expects Microsoft to focus on its cloud business rather than making another acquisition, especially one of a social network. "Social networking isn't a component of Microsoft's offering and it doesn't really need to invest in building one out when it likely won't become profitable or widely adopted for years," Elman said.
A timeline of Microsoft's bid to acquire TikTok
The Committee on Foreign Investment, tasked with investigating potential national security risks when foreign businesses invest in US companies, in November 2019 launched a national security review of ByteDance's 2017 acquisition of Musical.ly, the social network that became TikTok in the US.
CFIUS reviews have more than once prompted Chinese companies to divest ownership in US businesses. Chinese company Kunlun sold LGBTQ dating app Grindr for $608.5 million, for example, after CFIUS said its ownership of the company was a security risk.
Microsoft started discussions with ByteDance, whose CEO Zhang Yiming is a former Microsoft employee, during the CFIUS review.
TikTok filed a lawsuit against the US government on Aug. 24 and court documents revealed ByteDance and Microsoft notified CFIUS on July 30 about a "nonbinding letter of intent," an agreement companies typically sign before they begin the due diligence phase of an acquisition.
TikTok in the court filings described the letter as "contemplating that, among other things, Microsoft could acquire the US TikTok business and could serve as the trusted technology partner for TikTok's US business."
Then, the day after ByteDance notified CFIUS of the letter, news broke that Trump was planning to order ByteDance to divest its stake in TikTok's US operations. Microsoft was named publicly as a potential suitor for the first time.
The terms detailed in the letter of intent aren't public, but three days after providing notice, Microsoft announced the companies were exploring a deal in which Microsoft would purchase TikTok's operations in the US, Canada, Australia, and New Zealand. Microsoft said it would own and operate TikTok in those markets and may invite other American investors to become minority investors.
In its initial blog post announcing the bid, Microsoft spelled out how it planned to operate the service, including saying it would ensure US users' private data would be transferred to the US and deleted from servers outside the country.
By mid-August, other bidders started to enter the picture. Oracle was said to be working with TikTok investors in the US, including General Atlantic and Sequoia Capital, on a bid for a stake in TikTok. Then Walmart announced it was joining Microsoft's bid.
Then, last week, reports emerged that the Chinese government would rather see TikTok shut down US operations than be forced to sell.
Ultimately, Microsoft on Sunday released a statement that it had been notified ByteDance would not accept its bid.
"We are confident our proposal would have been good for TikTok's users, while protecting national security interests," Microsoft said in an unattributed statement. "To do this, we would have made significant changes to ensure the service met the highest standards for security, privacy, online safety, and combatting disinformation, and we made these principles clear in our August statement. We look forward to seeing how the service evolves in these important areas."
Oracle now has TikTok's "trusted technology partner" designation, but it's still unclear what exactly that means. Oracle and TikTok confirmed the companies have submitted a deal to the US government for approval. Meanwhile, Walmart has said it's still in talks with TikTok even while the Oracle deal moves forward.
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