Mike Isaac and Andrew Ross Sorkin
With tensions swirling between the United States and China, along with the complexities of running a social media company, any large acquisition appeared too treacherous to navigate. So Microsoft discussed taking a small stake in TikTok and becoming one of the app’s minority investors, said four people briefed on the conversations.
Even a small deal would be a win-win, the thinking went.
For Microsoft, a minority investment would potentially bring TikTok over to using its Azure cloud computing service, immediately making the app one of Microsoft’s biggest cloud clients, said the people, who declined to be identified because the details are confidential. (TikTok has been using Google’s cloud computing services to power its videos.)
For ByteDance and TikTok, a deal with Microsoft could help propel the valuation of the app’s business outside China to as high as $80 billion, the people said. It would also provide TikTok with the endorsement of a blue-chip American company to mollify the Trump administration, which had called TikTok’s Chinese ties a national security threat.
Apart from Microsoft, the bidders include Oracle, the enterprise software company, the people with knowledge of the talks said. Bankers and investors, some authorized and some simply trying to gin up a deal, have also called Netflix and Twitter about buying TikTok, they said, though it is unclear if those companies have a genuine interest in an acquisition. Microsoft, with the deepest resources and a market value of more than $1.6 trillion, still appears the furthest along for now, the people said.
A deal price is unclear, though numbers have ranged from $20 billion to $50 billion depending on what parts of TikTok will be sold, the people said. The talks are fluid and no deal may ultimately be reached.
On Monday, TikTok sued the U.S. government, arguing that the executive order had deprived it of due process. The suit could give TikTok more time to operate in the United States if the courts order it, a stalling tactic that may help the app wait it out past the Nov. 3 election.
Steven Davidoff Solomon, a law professor at the University of California in Berkeley, who contributes to The New York Times, said the United States’ forcing such a huge company to sell itself was “really unprecedented.” He added, “This is a forced sale, and ByteDance is trying to keep it from being as much of a fire sale as possible.”
This account of TikTok’s deal discussions was based on interviews with more than a dozen people who were involved in or were briefed on the situation. They spoke on condition of anonymity because they were not authorized to speak publicly.
Representatives from TikTok and ByteDance, Microsoft, Netflix, Twitter, Oracle and the White House declined to comment.
A spokesman for China’s Foreign Ministry, Wang Wenbin, called Mr. Trump’s executive order a “naked act of bullying,” and added that the U.S. government would eventually “reap what it sows.”
TikTok, which ByteDance created partly out of a $1 billion purchase of the lip-syncing app Musical.ly in 2017, has become a phenomenon in the United States and elsewhere. More than 100 million Americans regularly use the app, the company has said, especially teenagers and twentysomethings.
Doug Leone, one of Sequoia’s partners, and Bill Ford, chief executive of General Atlantic, became Mr. Zhang’s bridge to the White House, the people with knowledge of the talks said. In their conversations, the Trump administration had specific stipulations: First, it wanted TikTok to overhaul its governance and shareholder structure to reduce ByteDance’s ownership of the app. Second, it wanted guarantees that TikTok’s American user data be stored on U.S. servers.
The firms needed a major U.S. tech partner to get the deal done, the people close to the talks said. Mr. Zhang and the investors figured that Facebook, Google and Amazon were under too much antitrust scrutiny. But Microsoft, with its cash hoard of $137 billion, cloud expertise and strong government relationships, could work.
Mr. Zhang, a former Microsoft engineer, reached out to Microsoft executives to gauge their interest, said one person with knowledge of the talks. Sequoia and General Atlantic declined to comment.
TikTok could also be linked to Microsoft’s $7 billion advertising business. Together, that could make a meaningful difference to Microsoft’s growth, they said.
ByteDance and Microsoft came to see an acquisition of TikTok’s U.S. operations as a cleaner option, they added. Microsoft could allow TikTok to operate as a stand-alone unit, similar to how it had treated past large acquisitions, such as its $2.5 billion acquisition of the company behind the video game Minecraft in 2014 and its $26 billion purchase of professional networking site LinkedIn in 2016.
All the while, Trump administration officials were keeping an eye on the situation. Last month, Treasury Secretary Steven Mnuchin, who is chairman of Cfius and holds the final word on the panel’s recommendations of ByteDance’s purchase of Musical.ly, spoke with TikTok and Microsoft about how TikTok’s data should be on U.S. servers, three of the people said.
On July 31, Mr. Mnuchin presented the Cfius analysis of the ByteDance-Musical.ly deal to Mr. Trump, two people said. The recommendation: that ByteDance be ordered to sell TikTok to an American owner, with Microsoft acquiring most of TikTok’s business and the stakes held by ByteDance’s Chinese shareholders winnowed to a minority investment.
A spokesman for the Treasury and Mr. Mnuchin declined to comment.
In a statement, Mr. Navarro said, “Nobody exerts ‘influence’ over President Donald J. Trump. He listens carefully to a wide range of often sharply competing views and then he makes the best and most informed decision.”
The next 72 hours were chaotic. News leaked that Microsoft was in talks to acquire TikTok. Private equity firms and bankers circled. That briefly included Stephen A. Schwarzman, chief executive of the Blackstone Group, said people familiar with the talks. Blackstone declined to comment.
That weekend, Mr. Trump called Mr. Nadella about TikTok. Mr. Trump said ByteDance had 45 days to complete a sale of TikTok’s business in the United States. He added that any deal should help the U.S. government in some way, perhaps in the form of job creation or other economic benefits, or some kind of offering to the Treasury Department.
Privately, officials at Microsoft and TikTok were shocked. The 45-day window put TikTok at a disadvantage in negotiating the best deal. Mr. Trump also seemed to be arguing for “tipping the waiter,” essentially offering a percentage of the deal to the Treasury, the people said.
On Aug. 2, Microsoft issued a statement about its pursuit of TikTok and said it would provide “proper economic benefits to the United States, including the United States Treasury.” It did not elaborate on what that meant.
A few days later, Mr. Trump signed his executive order to block TikTok if it was not sold by mid-September. A week later, he issued another executive order giving ByteDance 90 days to close such a deal.
Even as deal discussions have continued, TikTok sued the U.S. government on Monday over Mr. Trump’s executive order.
“We far prefer constructive dialogue over litigation,” the company said in a statement. But given the executive order, it said, “we simply have no choice.”
Mike Isaac reported from San Francisco, and Andrew Ross Sorkin from New York. Reporting was contributed by Ana Swanson, Maggie Haberman, Michael J. de la Merced, Raymond Zhong and Alan Rappeport.