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Why Walmart and Microsoft's Joint Bid For TikTok Makes Strategic Sense

The partnership between Walmart and Microsoft helps them both battle Amazon, as well as others who are further ahead in social commerce.

It's not a deal you see every day -- but Walmart and Microsoft's joint bid to buy hot social app TikTok could work out well for all parties, according to an analyst report. 

Walmart  (WMT) - Get Walmart Inc. Report shares rose 2.7% to $140.31 on Friday, a day after the company announced that it's joining Microsoft  (MSFT) - Get Microsoft Corporation (MSFT) Report in its pursuit of Bytedance-owned TikTok's U.S. operations. Microsoft's bid for TikTok has been public for weeks; another suitor is Oracle  (ORCL) - Get Oracle Corporation Report, and a decision on the deal is reportedly imminent. TikTok CEO Kevin Mayer, who has served in the role for just four months, resigned earlier this week. 

Melodrama aside, the partnership between Microsoft and Walmart makes sense given the companies' existing relationship, wrote RBC analysts in a note on Friday. 

Walmart is likely one of Microsoft's largest "cutting-edge" customers, wrote RBC's Alex Zukin. And including them in the deal adds a compelling asset that Microsoft lacks: an ecommerce and logistics footprint. 

"Since Microsoft does not have a commerce offering itself, nor does it have logistical capabilities, including Walmart is a savvy move, in our opinion," he wrote. "It also probably helps to placate political concerns around the deal to some extent, as it potentially diversifies the risk."

As for Walmart, the retail giant appears to be searching for investments that bring long-term growth opportunities, and social commerce -- product promotion, transactions and advertising that take place in an appealing social app -- may be a big one. 

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Walmart may also view TikTok as a potential "profit subsidy" for its $500 billion retail operations, added RBC's Scot Ciccarelli. And given that both companies are battling Amazon  (AMZN) - Get, Inc. Report on multiple fronts, Walmart and Microsoft joining forces makes sense. 

However, Amazon likely isn't the only potential competitor that Walmart and Microsoft have in mind. 

Other social apps like Facebook  (FB) - Get Facebook, Inc. Class A Report and Instagram, or Chinese TikTok clone Douyin, have already developed ecommerce tools in their respective apps. And neither Microsoft nor Walmart wants to be left out of what could potentially be a transformative trend in ecommerce.

An RBC survey earlier this year found an acceleration in social commerce this year, with a 23% increase in Instagram users who reported making a purchase versus 15% in 2019. Both Facebook and Instagram have ramped up their commerce options this year, noted RBC's Mark Mahaney.

"We believe there currently is very little direct commerce on TikTok, but think they should be able to tap into this just as well," he wrote.