TikTok Caught in The Middle

The clock is ticking for ByteDance, Inc. (“ByteDance”), parent company of TikTok, the popular Chinese video app, as it continues to pursue a meaningful asset sale of its subsidiary in the midst of a global tug of war between the United States (“U.S.”) and China. (Lin, Wall Street Journal). With President Trump’s recent Executive Order requiring the potential Tik Tok deal to close by November 12th and China’s new export law restricting sales of artificial intelligence, ByteDance is facing an uphill battle to negotiate a cross-border, multi-billion dollar transaction.

Potential joint buyers, Microsoft and Walmart, have been in conversations with ByteDance regarding the sale of TikTok’s U.S. operations since July. (Isaac & Sorkin, New York Times). Apart from Microsoft and Walmart, other possible suitors have emerged in hopes of being a part of this colossal deal. Oracle, an enterprise software company, joined forces with Sequoia Capital to bid on the potential sale of TikTok. Id. While these early deal conversations with TikTok were productive, dynamics changed drastically on August 6th, when the White House issued Executive Order 13942. The Executive Order imposed a September 15th deadline for ByteDance to sell TikTok’s U.S. operations (later amended to November 12, 2020). (Federal Registrar). In the aftermath of the Executive Order, TikTok’s valuation plummeted from $80 billion to $20 billion. (Isaac & Sorkin, New York Times; Bloomberg; South China Morning Post).

In response, TikTok sued the U.S. government, claiming the Executive Order deprives TikTok of due process. (Isaac & Sorkin, New York Times). Tik Tok’s 39-page complaint against President Trump alleges that “[b]y banning TikTok with no notice or opportunity to be heard … the executive order violates the due process protections of the Fifth Amendment” and is a “misuse of the International Emergency Economic Powers Act, which allows the president to regulate economic transactions in a national emergency.” (CBS Los Angeles). Regardless of the outcome, the suit may be a successful stalling tactic and provide TikTok more time to negotiate with potential buyers. Id.

If pressure from the U.S. government was not enough, in early September the Chinese government announced a new restriction “on the export of artificial intelligence technologies including ‘personalized content recommendation’ tools.” (Ray, Forbes). The Chinese government insists the restriction is necessary to fill a void in global privacy regulations, but some find the timing suspicious. Id. If the new Chinese restrictions apply to TikTok’s prized algorithms, which recommend a personalized selection of videos to users, TikTok’s valuation will likely plummet further and potential buyers may opt to scratch the deal entirely. (Isaac & Sorkin, New York Times; Bloomberg, South China Morning Post).

According to people familiar with the matter, financials are not the only thing at stake for ByteDance founder, Zhang Yiming (“Zhang”). “I’m not sure price matters as much as pride,” Rebecca Fannin, author of Tech Titans of China, and founder of Silicon Dragon Ventures, replied when asked about Zhang’s desire to sell. (Bloomberg; South China Morning Post). Fannin describes Zhang as a “fiercely independent-minded entrepreneur” and added “[h]e may just decide not to do the deal at all.” (Bloomberg; South China Morning Post; Huang, Bloomberg). Amid growing scrutiny in the U.S., investment bankers have approached Zhang on going public in China or Hong Kong. (Bloomberg; South China Morning Post).

The U.S. and China’s involvement has caused Zhang to reconsider his options and also decreases the odds that a transaction will close within the Executive Order’s deadline. (Huang, Bloomberg). Despite the deal’s complications, the ByteDance team continues working “to craft a sale that can win approval from the government, an acquirer, venture investors, and ByteDance itself.” (Bloomberg, South China Morning Post). In the end, TikTok is more or less Zhang’s company, and he retains the ultimate decision of whether to sell, and if so, to whom?