By Pradeep Khurana, Managing Director of ContinuServe. ContinuServe is a global business process outsourcing firm, which helps corporations and private equity firms with their IT, Finance, and carve-out needs. More information at www.continuserve.com.
TikTok has recently been targeted by the Trump Administration. Trump has demanded that ByteDance either sell off the English-speaking portions of TikTok to a non-Chinese buyer by September 15th. TiKTok is a very popular social media app, where users can post highly viral dance videos. TikTok supposedly had approximately one hundred million US accounts. That is a very large percentage of the population and can potentially pose a data security issue. Now the clock is “TicTok’ing” down for the business to find an American Home. This separation of TIkTok’s US, Canada, Australia, and New Zealand from the rest of the world is not a simple task. There is talk of private equity firms, Microsoft, Oracle , and Alphabet potentially buying this attractive digital media unit. This purchase would be considered a “carve out” transaction and there are some tactical challenges.
If you look at TikTok, it has a variety of functions with operations globally. Business functions likely include product management, engineering, dev ops, security, finance and accounting, human resources, legal, and customer support. It is very complex to perform a carveout acquisition and takes significant planning and cost to execute. For example, how do you split up a global digital service. Will the service no longer be accessible in the other territories? Is the infrastructure commingled with other entities? How will you satisfy the US government that all personal data and information will not be copied and archived somewhere in China? Will content generated in other territories appear in the US? How will the application code base be split? How will functional teams get split? And even what will the new service be called? Will the scientists who created TikTok’s highly valuable algorithms become part of the new entity?
TikTok is owned by ByteDance, which according to its website offers services in over 150 countries with over 120 offices in China, Los Angeles, New York, London, India, Singapore, Indonesia, France, Germany, Korea, and Japan. ByteDance has over sixty thousand employees around the globe. This will make for a challenging separation. Since there are already some US offices that may make it slightly easier to do the carveout separation.
Already, the threat of the shutdown and sale of TikTok has driven a lot more users towards the Los Angeles-based competitor Triller.co.
The impact on the sale of TikTok “West” will be different if it is a strategic buyer, like a Microsoft, Oracle, or a private equity buyer. If it is a larger strategic buyer, they have a lot of the global back office resources to facilitate an easier transition. Large tech companies should be able to take over and grow the TikTok West operations. If it is a private equity buyer without a platform to put TikTok West underneath, it will need to quickly hire or outsource some of the missing functions. Private equity firms are accustomed to doing carve outs, but this is a very high profile situation that will be heavily scrutinized by US regulators and law enforcement.
One topic that is typical in carveout transactions is to have a “transitional services agreement” (TSA) that helps the buyer execute the transaction. The TSA outlines a set of services that the seller would continue to provide post-sale for a period of time. For example, perhaps some of the engineering functions could continue for a period of time post-transaction. Likely, the most politically sensitive functions like IT security and data storage may need to transition the most quickly.
The other question is what is the point of separating TikTok “West”. It may be to increase the security and integrity of the voluminous data stored on TikTok’s servers, supposedly from the Chinese Government. The challenge is there are already so many US TikTok users. The data may already be shared, but doing the carve-out may limit future security breach issues.
The sale of TikTok “West” will likely change the nature of the service. It will no longer be as global and its influence will be segmented geographically. It is likely that some of the popular content will just get reposted on both sites. The creation of TikTok “West” may spur more competition in the social media space, which may be a positive. Microsoft is very good at making large acquisitions and they have experience with social media, gaming, and advertising applications, like LinkedIn and XBox. There is also talk that Alphabet, the parent of Google, could also be bidding on TikTok. Alphabet obviously has significant capabilities in online advertising, mobile apps, and online video with YouTube. Oracle is more of an enterprise software and cloud company, so it is less clear how they would operate a social media advertising platform geared at millennials.
It will be very interesting to see how this carve-out transaction plays out as it will lead to changes throughout the tech ecosystem.