ByteDance Chief Reconsiders TikTok Options After New China Rules

Zheping Huang and Colum Murphy

Tue, Sep 1, 2020, 2:39 AM 5 min read

But after China signaled it will get involved in any deal’s approval, ByteDance founder Zhang Yiming is reconsidering his options and weighing the implications of Beijing’s involvement, according to people familiar with the matter. The company’s regulatory team and deal negotiators are huddling to discuss whether it’s still possible to craft a sale that can win approval from both governments, an acquirer, venture investors and ByteDance itself, said one of the people, asking not to be named because the matter is private.

Microsoft Corp. and Oracle Corp. have been deep in negotiations to buy TikTok U.S., submitting proposals while seeking reassurances from Washington that the Trump administration would bless their purchases. Microsoft is working on its bid with Walmart Inc., while Oracle has won support from venture backers such as Sequoia Capital.

But Beijing’s last-minute entry into the process raises the odds that Zhang will hold on to the U.S. operation beyond the stated American deadlines or even back out of a deal altogether. It’s likely the need for approval in Washington and Beijing -- along with the already complex negotiations -- will push any final deal beyond the November elections in the U.S. in any case, a person familiar with the matter has said.

“I’m not sure price matters as much as pride,” said Rebecca Fannin, author of Tech Titans of China, and founder of Silicon Dragon Ventures. “From the start, Zhang wanted to build a global company. Without the U.S. market, he can’t fulfill those ambitions. He’s a maverick, fiercely independent-minded entrepreneur. He may just decide not to do the deal at all.”

China Throws a Wrench Into Trump’s Plan to Force TikTok Sale

Talks are fluid and it’s still possible Zhang will proceed with a sale, the people said. He could also negotiate a deal with an acquirer, then not complete the transaction because of government demands.

The 37-year-old coder-by-training is something of a lone wolf in China’s tech industry, refusing to take money from rainmakers Tencent Holdings Ltd. or Alibaba Group Holding Ltd. He endured a succession of crackdowns yet managed to groom Douyin, TikTok’s Chinese cousin, into a rising internet star in the country. A fighter by nature, Zhang has several reasons to resist a TikTok sale in the clash with Trump.

He and his company don’t need the money. Privately held ByteDance is already worth $140 billion, according to startup tracker CB Insights, and is said to have generated more than $3 billion of net profit on more than $17 billion of revenue in 2019. Investment bankers had begun pitching Zhang’s team on going public in China or Hong Kong, even amid growing scrutiny in the U.S.

Local demand for initial public offerings from technology companies is white-hot, with first-time share sales likely to surpass the heights of the dot-com bubble. Zhang stands to make billions no matter what happens with Trump.

Just as important, if he sells the U.S. business, he can never get it back. Zhang would be relinquishing control over an asset that boasts upwards of a 100 million users in the U.S. and is on the cusp of monetizing that base. If TikTok gets banned in the U.S., the immediate outcome is it vanishes from Apple and Google app stores and software updates halt. Depending on how the U.S. Commerce Dept. defines Trump’s executive order, the sanctions could also cut off TikTok’s access to the local cloud services vital to maintaining data and streaming service.

But industrious American teens can still side-load the app, working around domestic restrictions to get software from abroad. In the meantime, TikTok can keep operating in the rest of the world (apart from India, where it is already banned) and build up the business further. It also leaves open the possibility of re-entering the U.S. if political dynamics change.

Separately, ByteDance is taking advantage of U.S. courts to see if it can stall Trump’s ban. Come November, there could be a new administration in power that may not regard shuttering TikTok as a high priority, not when the U.S. economy is reeling and Washington battles Beijing on a number of other geopolitical fronts from the South China Sea to trade and Taiwan.

“Zhang is betting on a court injunction to get the case past deadline and hopefully even past the Trump presidency,” said Xiaomeng Lu, a senior analyst, geo-technology for the Eurasia Group. “His last hope is that the U.S. legal system still functions as a guard rail when the white house malfunctions.”

Beijing’s involvement could end up benefiting Zhang. China’s assertion that its regulators will weigh in on any TikTok asset sale could give Zhang a possible out, said Ding Chenling, a tech entrepreneur who said he has known the ByteDance founder for a half-decade. It could take up to 30 days for Beijing to greenlight ByteDance’s application to sell tech to a foreign acquirer, which means it may well pass Trump’s target for banning TikTok.

“He thought that by making a promise to follow international standards or rules he would be able to escape the regulation or the kind of pressure from the American government,” said Ding. “But I think now he realizes he might have been wrong and that if he doesn’t want to sell the company, the only one who can help him is the Chinese government -- which is what he’s tried to avoid the past few years.”

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