The U.S. House of Representatives on March 13 voted overwhelmingly to ban the popular China-owned social media app TikTok if the company is not divested.
The future of the app, which has 170 million U.S. users, lies in the hands of the Senate. And it may take months before Senate leadership brings the issue up for a vote. The presidential election in November also complicates any legislative decision, and Congress may very well punt the issue until after the election to avoid political complications.
Assuming Congress goes ahead with the decision to force an action on TikTok, a ban, and not a sale, is ultimately the most likely outcome.
A sale would require threading an extremely small needle that needs signing-off by the Chinese Communist Party (CCP) at a valuation that all parties can agree on. It’s an almost impossibly tall task.
Immediately following the vote by the U.S. House to move ahead with a ban, Chinese officials decried the decision as “unfair” suppression of “other countries’ superior companies.”
This is obviously posturing, but it sets the bar very high upfront in terms of negotiations for divestment.
Given CCP leader Xi Jinping’s recent obsession with control, domestic superiority, and tech industry dominance, it’s unlikely that China would agree to sell TikTok and its source code.
In addition, Beijing’s recent attitude suggests that the financial interests of TikTok’s shareholders aren’t very high on the CCP’s list of priorities. Casting the U.S. government as the enemy of Chinese innovation and a foreign looter of Chinese assets may just be part of Xi’s plans.
But let’s set aside politics and assume that China will come to the negotiating table in good faith to sell TikTok’s U.S. assets.
Does that make a sale straightforward? Hardly.
ByteDance, TikTok’s parent company, was valued at $220 billion in its last funding round in 2023, according to data from PitchBook.
Bidding for a carveout of TikTok’s U.S. operations would undoubtedly begin in the hundreds of billions of dollars.
ByteDance has a board of directors consisting of three Americans of significant financial experience and influence: William Ford, CEO of private equity firm General Atlantic; Philippe Laffont, founder of hedge fund Coatue Management; and Arthur Dantchik, co-founder of trading firm Susquehanna International Group.
And aside from the CCP having the ultimate say (note that the Chinese government has immaterial economic and legal ownership in ByteDance and wields overarching “golden share” influence), ByteDance has a majority—estimated to be 60 percent—foreign institutional ownership from venture capitalists, corporations, and private equity firms unlikely to accept financial loss.
This is to state that a carveout of TikTok is not going to be cheap for any interested buyer.
The Financial Times estimates that TikTok’s U.S.-generated revenues are about $16 billion per year. The average enterprise value to revenue multiple across a cohort of similar publicly traded social media companies (Meta, Reddit, Snapchat, and Pinterest) is currently seven times the annual sales revenue, as of March 22. This very simple valuation model puts TikTok’s valuation at roughly $110 billion (seven times $16 billion).
Such a high potential price already indicates a small potential buyer pool. In 2020, when President Donald Trump initially ordered TikTok to be sold, Fortune 500 giants Walmart and Oracle were cited as interested parties.
More recently, other prominent investors have been reported to be interested. The list includes former Activision Blizzard CEO Bobby Kotick, according to a Wall Street Journal report, and Canadian investor Kevin O’Leary.
Former Treasury Secretary Steven Mnuchin also stated that he is forming an investor group to acquire TikTok.
“It’s a great business, and I’m going to put together a group to buy TikTok,” he told CNBC on March 14.
More investors will likely come forward in the future months. These investors would need significant equity and debt backing from banks and other institutional investors to pull off such a deal.
Mr. O’Leary’s recent comments on CNBC, however, underscore the challenges of agreement on valuation.
“What you’re getting is the valuable domestic brand TikTok and 170 million users, with no data,” he said on CNBC’s “Street Signs Asia” program.
It may not be fully accurate, but Mr. O’Leary is highlighting the crux of the problem with any U.S. acquisition of TikTok. The buyer is acquiring 170 million customers and TikTok’s brand in the United States.
The purchase may come with some data—the data associated with those 170 million users that ByteDance claims to store in data centers within the United States and Singapore. But that data is not what’s valuable about TikTok.
Any purchase of TikTok’s U.S. or international operations would not come with the proprietary algorithms and source code underlying TikTok’s application. Those algorithms reside in China, and ByteDance would not divest that type of data.
And the reasons may lie beyond commercial or economic. Those algorithms are what the CCP uses to influence, monitor, and spy on international users of TikTok. That has national security concerns for Beijing.
As a result, a potential U.S. buyer would receive a shell of TikTok. It’s not worthless, but it is unlikely to be worth hundreds of billions of dollars.
Mr. O’Leary put $20 billion to $30 billion as his starting bid as a result.
That’s almost a 90 percent haircut from ByteDance’s last funding round. I’ve never witnessed a bid-ask spread that far apart ever bridged in negotiations.
Lastly, the TikTok bill imposes a six-month threshold for ByteDance to divest TikTok’s U.S. operations. That alone is an almost impossible deadline to meet, given the local and commercial nuances of negotiating a sale.
