By Aaron Tilley 

For Microsoft Corp. Chief Executive Satya Nadella, completing an acquisition of TikTok's U.S. business could pose a new challenge: How to reshape a just-bought business quickly, without damaging its successful formula.

Mr. Nadella typically has taken a light-touch approach in Microsoft's biggest acquisitions. After the software giant shelled out $26 billion on LinkedIn in 2016, it took years to integrate the business, in part to avoid disrupting the culture that had made the business-focused networking startup a success.

"This is not about changing the core of LinkedIn," Mr. Nadella said at the time of the takeover. He largely repeated the strategy two years later with Microsoft's $7.5 billion acquisition of developer collaboration platform GitHub Inc.

Sticking to that script with TikTok could be harder, though, if Microsoft prevails in its bid to buy parts of the video-sharing app from Beijing-based parent ByteDance Ltd. amid pressure from the Trump administration over security concerns.

President Trump last week signed an executive order that would take effect in September and effectively bar American transactions with TikTok's owner, including possibly downloads of the app, unless the U.S. business is sold. The administration's position is that TikTok poses an economic and national-security threat to U.S. interests. TikTok disputes it poses such a risk and said it would challenge the order.

Microsoft has promised the U.S. government it would address the security concerns and ensure that data on the more than 100 million American users would be held only in the U.S. That is a contrast to Microsoft's typical take-it-slowly integration approach, said Robert Majek, a research analyst at Raymond James & Associates.

"What I think Microsoft will do with TikTok is, at the beginning, throw as much resources as it can [at the integration] to get them on their feet, and then get out of the way," he said.

To address U.S. security concerns, industry officials have said Microsoft, or any other buyer, would have to rewrite TikTok's software to ensure people working on the app's legacy operations couldn't access the U.S. data.

Republican Sen. Josh Hawley of Missouri has urged Microsoft not to rely on ByteDance employees, who might be affiliated with the China's Communist Party, in the transition, expressing concern they could potentially add "back doors" for data access. TikTok has said it would never share American user data with Chinese authorities.

Microsoft has set a mid-September deadline for the deal that would also include TikTok operations in Australia, Canada and New Zealand. It declined to comment on how it might integrate the business. Mr. Trump has said a buyer also could acquire all of TikTok. Microsoft hasn't said whether it would consider a complete purchase.

Changing its takeover approach may be uncomfortable for Microsoft, given that it struggled with acquisitions before Mr. Nadella became CEO in 2014. The company spent $7.2 billion on Nokia Corp.'s mobile-phone business in 2013, only to take a $7.6 billion write-off on the deal two years later. Similarly, after buying advertising technology company aQuantive for $6.3 billion in 2007, Microsoft wrote off almost the entire value five years later.

With LinkedIn, Mr. Nadella deployed a hands-off approach to integrating the business. It was only last year that Microsoft began moving LinkedIn onto its cloud, and LinkedIn's CEO still reports directly to Mr. Nadella. The integration was so light that LinkedIn's staff rarely noticed they were part of a tech giant, a former employee who lived through the transition said.

LinkedIn and Microsoft initially integrated their systems mainly on the surface, for example by allowing LinkedIn profile information to show up in Microsoft Office 365 applications such as email. Those features would have been possible even if Microsoft hadn't bought LinkedIn, said Rob Helm, an analyst at Directions on Microsoft, a consulting firm that helps companies integrate with the software giant's products.

The hands-off takeover strategy has shown success. LinkedIn and GitHub have registered strong user growth, although some analysts have questioned whether Microsoft maximized the value of those acquisitions.

When Microsoft acquired LinkedIn, the network had 433 million registered users with growth slowing. For the most recent quarter, Microsoft said LinkedIn had more than 706 million users, and sales have roughly doubled since the purchase.

GitHub, which now reports into Microsoft's cloud-computing group, has increased user numbers to more than 50 million from 28 million at the time of its acquisition.

"An absolute key lesson from the LinkedIn and GitHub acquisitions is to leave it alone," said Alex Zukin, an analyst at RBC Capital Markets. "Keep the team together and give them support, but let them run for at least a year or two. Don't do anything that could jeopardize that."

The LinkedIn experience also has shown how Microsoft has been able to navigate political issues with Beijing -- an area that is again in the spotlight, as U.S. pressure to force a sale of TikTok has been poorly received in China. Microsoft has allowed some content on LinkedIn, as well as search engine Bing, to be censored in China to address local concerns.

Still, to some, Mr. Nadella's approach has failed to make the most of businesses he has bought.

"They haven't fully realized the value of LinkedIn," said Ray Wang, founder of the Silicon Valley-based advisory firm Constellation Research Inc. "LinkedIn on its own is awesome, but Microsoft doesn't seem to know how to use it other than selling ads."

 

(END) Dow Jones Newswires

August 13, 2020 16:53 ET (20:53 GMT)

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