Beijing has successfully set roadblocks into the acquisition talks between TikTok and various prospective American buyers according to multiple reports from Reuters, the Wall Street Journal, and Bloomberg.
Late last week China introduced a set of new export restrictions on 23 categories of technology. Included among these was any content-recommendation technology, meaning TikTok's parent company ByteDance would have to seek government permission if it was going to include TikTok's recommendation algorithm, which decides what videos to show users, in any deal. TikTok's recommendation algorithm is considered the secret sauce that makes the app both highly addictive and valuable.
Currently, TikTok's Chinese parent firm ByteDance is in talks with prospective acquirers about selling off parts of the app to a US buyer, including its US operations.
The Wall Street Journal reported Tuesday that the prospect of having to strip TikTok of its recommendation algorithm had stalled acquisition talks. A source close to the talks told the Journal that buying TikTok without its recommendation algorithm would be like buying a fancy car with a cheap engine.
Reuters reported Tuesday that TikTok's prospective buyers have come up with four ways to they could set up a deal. They are:
- Buy the app without its recommendation algorithms. This could potentially lower the sale price, as any buyer would have to subsequently build their own algorithms from scratch.
- Seek governmental approval from China to include the algorithms in the sale. This could be a lengthy process that exceeds Trump's September 20 deadline for talks, plus there's no guarantee Beijing would sign off on it.
- License the algorithms from ByteDance. This might displease the US, which wants TikTok to separate its US operations entirely from ByteDance.
- Ask the US security panel overseeing the deal for a transition period of up to one year. Sources told Reuters it's not clear whether the timeframe of this would match up with China's rules.
China's intervention has apparently also caused ByteDance CEO Zhang Yiming to reconsider his options, sources told Bloomberg. One person familiar with the matter said the remonstrating from Washington and Beijing could delay any final deal until after the US presidential election in November.
The frontrunners to buy TikTok in the US at the moment are two groups: a coalition of Microsoft and Walmart, and Oracle along with a handful of ByteDance investors.
US video app Triller has also said it's a potential buyer, although ByteDance has denied it's in talks with the company. A source close to Triller told Business Insider this week that it would buy TikTok's US operations without the algorithm.
TikTok is racing against the clock, as President Trump's issued two executive orders in August that threaten its presence in the US. The first order bans "transactions" between US citizens or companies with TikTok. The second gives the company 90 days to divest its US operation or face a ban. It's not clear what authority the president has to "ban" an app.
TikTok has also filed a lawsuit challenging the executive order, arguing it was denied due process. CNBC reported last week that a deal had been slated to be announced as soon as Tuesday.
China has downplayed suggestions that its new export rules relate to any specific company. However, when Trump said the US Treasury should get a cut of any TikTok sale, Chinese state media reacted furiously, calling the proceedings "open robbery." A Chinese newspaper also described the order as a "smash and grab."
