By Michael C. Bender, Georgia Wells, Miriam Gottfried and Aaron Tilley
After months of maneuvering over the future of TikTok, it took a
pair of 11th-hour phone calls with two of America's most powerful
executives to persuade President Trump to agree to a tentative
deal.
Key to getting the president on board with the idea, which
involved Oracle Corp. and Walmart Inc. taking stakes in a new
TikTok based in the U.S., was a thinly sketched-out plan to create
a $5 billion education fund, described by people involved as a
gesture to placate Mr. Trump. The provision came so late that when
it was announced, TikTok and its Chinese parent company weren't
aware it was part of the plan.
The last-minute wrangling came at the end of a week in which a
small group of executives worked with officials led by Treasury
Secretary Steven Mnuchin to make sure a proposal would pass muster
with Mr. Trump. The president has threatened to ban the
Chinese-owned app as a national security risk, and the talks were
aimed, essentially, at Americanizing TikTok. The group was making
headway, but the outcome still wasn't clear.
On Friday Mr. Trump jumped on the phone with Oracle Chairman
Larry Ellison and Walmart Chief Executive Doug McMillon. Mr.
Ellison, a Trump supporter and one of the world's richest people,
spent most of the time getting the president comfortable with the
deal structure and Oracle's role in addressing his security
concerns, according to people familiar with the matter.
The executives talked with Mr. Trump again on Saturday, the
people said. Mr. Trump still wanted something additional, which led
to the education initiative, details of which remained unclear. The
president disclosed his support in principle for the tentative deal
within hours -- though it still needs final approval from all
parties.
Over two months of negotiations with little precedent in
American business history, a mix of powerful personalities,
corporate strategies and geopolitical machinations have intertwined
to decide the fate of an app that 100 million Americans use to
share short dance clips and amusing videos. At the center has been
the U.S. president and his desire to bring at least the U.S.
operations of China's most globally successful tech platform under
American control.
Little about the negotiations was routine, including the
outcome. Investment bankers normally enmeshed in corporate deal
making weren't involved, one person said. And if the U.S. succeeds
in wresting control of a big part of one of China's national
success stories, that would likely trigger further consequences in
the escalating U.S.-China battle for technological supremacy.
As in the days leading up to White House approval in principle,
much remains uncertain. Details still need to be hashed out and
approved by U.S. officials, including the ownership stakes and
TikTok's valuation, which could be as much as $60 billion. Mr.
Trump reiterated on Monday he expects the new company to be
U.S.-controlled. "If we find that they don't have total control,
then we're not going to approve the deal," he said on Fox News.
On Monday, participants were openly disagreeing over the
ownership structure of the proposed new company, TikTok Global. A
spokesman for TikTok parent ByteDance Ltd. said it would retain an
80% stake outright, while Oracle said on Monday morning the 80%
would be distributed proportionally to ByteDance's current
shareholders, which include U.S. investors, and "ByteDance will
have no ownership in TikTok Global."
China's government has yet to give its nod. Officials there
didn't respond to requests for comment. Hu Xijin, editor in chief
of the Global Times, a Communist Party-backed tabloid, said Monday
on Twitter he thought Beijing wouldn't approve the current
agreement. He said it "would endanger China's national security,
interests and dignity." Mr. Hu had earlier held up the U.S.'s
restructuring of the deal as a model that should be promoted
globally.
The arrangement announced over the weekend would transfer
TikTok's data to U.S. servers with enhanced security run by Oracle
and overseen by Oracle CEO Safra Catz, who was once considered for
Mr. Trump's national security adviser. Oracle has promised that
TikTok users' data would be secure.
The structure looks different from Mr. Trump's initial demands.
It could leave TikTok's Beijing-based parent, ByteDance, as a big
shareholder in the new U.S.-based company. The preliminary
agreement also doesn't call for the transfer of ownership of
TikTok's vaunted algorithms, the app's secret sauce and a prized
Chinese asset.
Mr. Trump put TikTok in his crosshairs in July when his
administration said it might ban the app for Americans because of
concerns its data could be accessed for ill purposes by the Chinese
government, something TikTok has said wouldn't happen. He later
issued an executive order setting a deadline for mid-September to
come up with a deal, and a separate 90-day deadline to make it
final.
For most of the ensuing weeks, Microsoft Corp. seemed to be in
pole position. It would have bought TikTok's operations in the U.S.
and three other countries. Microsoft CEO Satya Nadella spoke to Mr.
Trump on Aug. 2 and said the company would work toward a deal.
Walmart later teamed up with Microsoft in that effort. Walmart
started talking with the ByteDance chief executive after Mr. Trump
made his demands, working to forge a closer relationship with
ByteDance in the U.S. and globally, aiming to build its advertising
and e-commerce businesses through the platform, said a person
familiar with the situation. Mr. McMillon let ByteDance and Bill
Ford, CEO of ByteDance investor General Atlantic, know Walmart was
interested in being part of the deal regardless of the other
buyers, said this person.
As the deadline neared, Microsoft's prospects faded. China's
government in late August issued new restrictions on the export of
artificial-intelligence technology, signalling that TikTok's core
algorithms couldn't be included as part of a deal. Beijing
indicated to ByteDance that it didn't want a U.S. company to
control TikTok's technology and it didn't want a forced sale, one
person familiar with the situation said.
It also became increasingly clear that Zhang Yiming, founder and
chief executive of ByteDance, didn't want to give up control of
TikTok, which had enabled him to build a global hit unlike any
other Chinese tech entrepreneur, according to people familiar with
his thinking. ByteDance's U.S. investors, too, were unhappy that
their golden ticket might be snatched away and sold to other
American owners, one of the people said.
Instead, Oracle and ByteDance put together an offer they
believed would satisfy technical concerns from the Trump
administration, even if it fell short of a full sale. Whereas
Microsoft was really interested in control, Oracle was willing to
be a minority investor, and was primarily focused on winning a
marquee customer for its cloud business, according to people
familiar with the companies. Oracle had a history of working with
the U.S. government, so ByteDance and its investors saw the company
as being more aligned with its interests.
About 10 days ago, ByteDance brought the proposal to Mr.
Mnuchin, who had spent months trying to find a way to keep TikTok
from being banned in the U.S. while addressing security concerns
inside the administration. The fight had become a reprise of roles
during the China trade negotiations, as Mr. Mnuchin again jousted
with Peter Navarro, a White House trade adviser, in front of the
president.
Over the second weekend of September, ByteDance told Microsoft
it was out, and that Oracle was its pick. Walmart indicated it
still wanted to participate in a deal.
In the final week of jostling, the participants tried to
fine-tune an agreement they thought could win a green light from
Mr. Trump and China's leadership. The negotiations were conducted
by a tight-knit group that, according to a person familiar with
them, included Mr. Mnuchin, Oracle's Mr. Ellison and Ms. Catz,
Walmart's Mr. McMillon, Mr. Zhang of ByteDance and Mr. Ford of
ByteDance investor General Atlantic.
The initial proposal included many of the core elements of what
ended up being approved by the president, the people said: TikTok
Global as a U.S.-based entity, with Oracle vouching for its data
security, and a plan to take the new company public in the U.S.
that would give it majority non-Chinese ownership. Mr. Ford
proposed a requirement to fill the new company's board with U.S.
citizens except for Mr. Zhang, said people familiar with the
situation.
A term sheet went to the secretive government panel that had
been reviewing the security concerns about TikTok, the Committee on
Foreign Investment in the United States.
Cfius pushed the group to firm up a commitment that TikTok would
go public within 12 months, to settle on its board composition and
to describe the ownership of Oracle and Walmart and how that would
be structured.
Talks were jarred repeatedly by Mr. Trump's off-the-cuff
remarks. Early on, some participants were unsure about which
deadline they had to meet. Mr. Trump had said publicly the deadline
was Sept. 15, a Tuesday, but Mr. Mnuchin the day before clarified
they had until the following Sunday.
Mr. Mnuchin was initially skeptical of the Oracle deal, and
unsure the president would accept anything less than a sale of
TikTok's U.S. operations.
Company executives stressed to Mr. Mnuchin there were no other
options, apart from banning the company. Mr. Mnuchin came around,
and started pitching the president on a deal he believed would
address U.S. national security concerns and also satisfy the
Chinese government, and the Chinese investors.
Inside the administration, there was a growing realization that
China wouldn't let ByteDance sell all of TikTok or core assets such
as its algorithms. White House officials believed the president's
push to ban TikTok in the U.S. had embarrassed Beijing, which was
now determined to make ByteDance a global success story and oppose
a sale.
The group spent much of its time persuading U.S. officials that
ByteDance wasn't another Huawei Technologies Co., the Chinese
telecom giant Mr. Trump had put strict limites on, one of the
people said. Unlike Huawei, ByteDance always had major global
investors, and only two members of its five-person board are
Chinese nationals, including Mr. Zhang.
In the days before signing off, Mr. Trump sent mixed signals. He
told reporters on Wednesday he was skeptical of a deal that left
Chinese investors in control, and repeatedly said Microsoft was
still involved. People familiar with the matter said Microsoft
hadn't been involved since Sept. 13.
On Wednesday, Mr. Trump said his initial demand that the U.S.
Treasury receive a cut of the deal -- a payment he likened to
real-estate "key money" -- had been blocked by White House lawyers.
In private meetings, Mr. Trump continued to press people involved
in the talks about a payment to approve the deal, one of the people
said.
Secretary of State Mike Pompeo and Attorney General Bill Barr
reiterated objections to the deal, saying the national security
issues hadn't been fully addressed. National Security Council staff
in Mr. Trump's White House have continued to raise questions about
the current proposal.
Mr. Mnuchin and other U.S. officials sought to ensure that U.S.
investors would ultimately control a majority stake in the new
TikTok Global, according to people familiar with the matter. They
also went back to ByteDance with enhanced data-security and
data-management safeguards, which the Chinese company agreed to in
a late-night conference call with the secretary, according to one
of the people.
"I think his role here was, 'How can I have everyone save face
here and structure it in a way that China will sign off on it?' "
said Stephen Pavlick, a policy analyst at Renaissance Macro, and
former Treasury aide who worked on Cfius issues.
One person familiar with the talks said changes were made during
the week to all three major aspects of the deal: the size of
investments and corporate governance; parameters for cloud storage
of user data; and the security of the source code and artificial
intelligence. But those changes were described as incremental.
Cfius signed off on the revised proposal, which included a
five-person board for the new TikTok Global, with four Americans:
Messrs. Ford and McMillon along with leaders from two other U.S.
investors in ByteDance -- Doug Leone, global managing partner of
Sequoia Capital, and Arthur Dantchik of Susquehanna International
Group. Mr. Zhang would be the fifth member, according to the
proposal, which could still change.
Oracle would control the user data and guarantee its security,
and the companies pledged the deal would create 25,000 jobs in the
U.S. and lead to more than $5 billion in new tax dollars to the
U.S. Treasury.
It still wasn't clear whether Mr. Trump would give the deal his
blessing, the people said. Then, on Friday morning, the Commerce
Department issued its rules for implementing Mr. Trump's original
ban, saying Americans would be barred from downloading TikTok at
midnight Sunday, Sept. 20. It was a procedural move, but it
highlighted the peril facing TikTok if a deal wasn't completed.
TikTok responded by filing suit in federal court seeking to block
the order.
The phone calls with Messrs. McMillon and Ellison helped win Mr.
Trump's blessing for the preliminary deal. Mr. Ellison explained
the technical side of Oracle's security in a way that resonated for
Mr. Trump more clearly than similar conversations with his national
security team.
By Friday afternoon, the companies were hoping they would get an
announcement later that day. The death of Supreme Court Justice
Ruth Bader Ginsburg put everything on hold for a day.
After the subsequent calls on Saturday and the last-minute
education-fund pledge, Mr. Trump said he had blessed the deal in
principle, making sure to mention Mr. Ellison.
"TikTok is moving along," Mr. Trump said. "We're dealing with
Oracle, which you know of -- Larry Ellison. And we're dealing with,
as a combination, Walmart -- Walmart, a great company. A great
American company. The security will be 100 percent."
Executives at the companies involved were pleased, and relieved,
but not all on the same page. ByteDance issued a statement on its
Chinese social media site saying it hadn't heard of the $5 billion
education fund plan until seeing media reports about it. As of
Sunday, according to people familiar with the matter, ByteDance and
TikTok were still unclear about exactly what it is and how it would
be funded.
--Rolfe Winkler, Kate Davidson, Liza Lin and Sarah Nassauer
contributed to this article.s
Write to Michael C. Bender at Mike.Bender@wsj.com, Georgia Wells
at Georgia.Wells@wsj.com, Miriam Gottfried at
Miriam.Gottfried@wsj.com and Aaron Tilley at
aaron.tilley@wsj.com
(END) Dow Jones Newswires
September 21, 2020 19:01 ET (23:01 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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