ByteDance acquired Shanghai-based video app Musical.ly - whose user base was largely American - for $1 billion in 2017 without seeking CFIUS approval, relaunching it as TikTok the following year.
ByteDance abandoned the sale of TikTok in the United States on Sunday to pursue a partnership with Oracle Corp that it hopes will spare it a U.S. ban while appeasing China’s government, people familiar with the matter told Reuters.
The Beijing-based company had been in talks to divest TikTok’s U.S. business to Oracle or a consortium led by Microsoft Corp after U.S. President Donald Trump ordered the sale last month and threatened to shut down the short-video app in the United States.
While TikTok is best known for its anodyne videos of dancing that go viral among teenagers, U.S. officials have expressed concerns that user information could be passed to China’s communist government. TikTok, which has as many as 100 million U.S. users, has said it would not comply with any request to share such data with Chinese authorities.
Sale negotiations were upended by China updating its export control rules last month to give it a say over the transfer of TikTok’s algorithm to a foreign buyer. Reuters reported last week that China’s government would rather see TikTok shut down in the United States than let it be part of a forced sale.
Under the proposal, Oracle will be ByteDance’s technology partner and assume management of TikTok’s U.S. user data, the sources said. Oracle is also negotiating taking a stake in TikTok’s U.S. operations, they added.
Some of ByteDance’s top backers, including investment firms General Atlantic and Sequoia, will also be given minority stakes in TikTok’s U.S. operations under the proposal, one of the sources said.
It is unclear whether Trump, who wants a U.S. technology company to own most of TikTok in the United States, will approve the deal. The Committee on Foreign Investment in the United States (CFIUS), a U.S. government panel which reviews deals for national security risks, is overseeing the ByteDance-Oracle talks.
“User data protection and assurances around how the company’s algorithms push content to U.S. users are thoughtful components of a substantive solution, but whether they can change political outcomes is a much more difficult question,” said regulatory lawyer John Kabealo, who is not involved in the deal discussions.
ByteDance plans to argue that CFIUS’ approval two years ago of China Oceanwide Holdings Group’s purchase of U.S. insurer Genworth Financial offers a precedent for its proposal with Oracle, the sources said.In that deal, China Oceanwide agreed to use a U.S.-based, third-party service provider to manage the data of Genworth’s U.S. policyholders. ByteDance will argue a similar arrangement with Oracle can safeguard TikTok’s U.S. user data, the sources said.
ByteDance and Oracle did not respond to requests for comment. The White House declined to comment.
Oracle’s chairman Larry Ellison is one of the technology world’s few Trump supporters. His firm has significant technological prowess in handling and safeguarding data, but no social media experience. Its clientele comprises companies, rather than consumers. TikTok’s user data is currently stored in Google owner Alphabet Inc’s cloud.
Earlier on Sunday, Microsoft said ByteDance had informed it that it would not be selling it TikTok’s U.S. operations.
Walmart Inc, which had joined the Microsoft bid, said on Sunday it was still interested in investing, and that it would have further discussions with ByteDance and other interested parties.
“We know that any approved deal must satisfy all regulatory and national security concerns,” Walmart said.
Jeffrey Towson, professor of investment at Peking University’s Guanghua school of management, said Oracle’s ownership of TikTok’s U.S. operations with access but not ownership of ByteDance’s core technology mirrored how many Western companies operate in China.
“This is bad news for Walmart more than anyone else,” he added. “Combining TikTok’s entertainment and user engagement with its e-commerce platform was its best shot at catching up with Amazon.”
As Sino-U.S. relations deteriorate over trade, Hong Kong’s autonomy, cybersecurity and the spread of the novel coronavirus, TikTok has emerged as a flashpoint.
Trump signed two executive orders last month targeting TikTok and ByteDance. The first bans U.S. companies from transacting with them and is due to come into effect on Sept. 20. The second requires ByteDance to sell TikTok by Nov. 12.
Were Trump to agree to ByteDance’s proposed deal with Oracle, he would have to rescind his order calling specifically for TikTok to be divested.
As many as 40% of Americans back Trump’s threat to ban TikTok if it is not sold to a U.S. buyer, a Reuters/Ipsos national poll found last month. Among Republicans – Trump’s party – 69% said they supported the order, though only 32% said they were familiar with the app.
The White House has stepped up efforts to purge what it deems “untrusted” Chinese apps from U.S. digital networks. Beyond TikTok, Trump has also issued an order prohibiting transactions with Tencent Holding Ltd’s messenger app WeChat.
Earlier this year, Chinese gaming company Beijing Kunlun Tech Co Ltd sold gay dating app Grindr, bought in 2016, for $620 million after CFIUS ordered its divestment.
ByteDance acquired Shanghai-based video app Musical.ly – whose user base was largely American – for $1 billion in 2017 without seeking CFIUS approval, relaunching it as TikTok the following year. Reuters reported last year that CFIUS was investigating TikTok.