Why a Microsoft TikTok Deal Could Happen

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There is plenty of reason to believe Microsoft  (MSFT) - Get Report will acquire TikTok. And the market apparently believes it, too. 

Recently, President Trump has said he wants to ban TikTok, a Chinese-owned company, from operating in the United States. TikTok is currently owned by Chinese tech company ByteDance and, according to some, is worth somewhere between $40 billion and $50 billion. The company is currently seen to be in explosive growth mode, perceived t be adding users — and monetizing them — at a fast clip. 

The desire to block TikTok from the U.S. is part of the White House’s broader agenda of disabling Chinese companies and officials from obtaining U.S. technology and intellectual property. During the current administration, the White House has blocked U.S. semiconductor companies from selling to Huawei, one of China’s largest and most powerful technology hardware conglomerates. 

In the past few weeks, whispers have surfaced that Microsoft may want to acquire TikTok. Sunday, Microsoft said in a statement it is hoping to aggressively move forward with the potential deal. 

Here’s what Microsoft said:

"Microsoft fully appreciates the importance of addressing the President’s concerns. It is committed to acquiring TikTok subject to a complete security review and providing proper economic benefits to the\ United States, including the United States Treasury. Microsoft will move quickly to pursue discussions with TikTok’s parent company, ByteDance, in a matter of weeks, and in any event completing these discussions no later than September 15, 2020. During this process, Microsoft looks forward to continuing dialogue with the United States Government, including with the President.” 

Of the several reasons the deal may very well happen, there is one key enabler: “Microsoft, which has

already got a green light from the White House to pursue the deal with certain security requirements needed to go forward,” Dan Ives, analyst at Wedbush Securities wrote in a note, would be taking TikTok out of China’s hands.This would play into the White House’s agenda. 

The deal is more than feasible, too. Ives poses that Facebook  (FB) - Get Report, Google  (GOOGL) - Get Report and Amazon  (AMZN) - Get Report are likely out of the running to buy the company because of the regulatory scrutiny they are under. Most other companies can’t pay $40 billion for an asset. But Microsoft has $136 billion in cash, roughly $63 billion in debt and an annual stream of earnings before interest, tax and non-cash expenses at $70 billion and growing, according to FactSet estimates. And Ives says TikTok could be worth $200 billion in a few years as the company adds users, keeps them engaged and finds multiple ways to monetize them. "We believe from a management and Board perspective this is a unique deal of a decade opportunity with a price tag that could easily be consummated,” Ives said.

Microsoft, currently most focused on business and enterprise software services, has tried several avenues to reach try consumer. Its computer software programs are certainly not the driver of the recent earnings and stocks price growth. 

So what do investors think of this? 

Well, the stock rose 5% to $217 a share Monday, the day after Microsoft’s statement. A $50 billion business is roughly 3% of Microsoft’s plus-$1 trillion market capitalization. And while this may not be an acquisition targeted at any synergies in particular, one would have to consider any synergies — cost or revenue ones — as part of the increased valuation as a result of a deal. 

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