TMT update (TikTok)

Recent/upcoming developments… President Trump has made repeated comments this week indicating that negotiations are underway regarding a divestment of TikTok’s U.S. operations.  He has also floated the idea of the U.S. government owning 50% of the company, which has evoked a skeptical response from some Congressional Republicans.  And, reports suggest that the White House is open to ByteDance retaining a minority stake, to which Republicans have expressed strong objections.  Trump and China’s President Xi reportedly discussed the TikTok situation, and in a presumably a related development, the Chinese government appears to have reversed its objections to a divestment.

* The Protecting Americans from Foreign Adversary Controlled Applications Act (PAFACA), which requires that TikTok’s U.S. operations be divested or that it be banned in the U.S., went into effect on 1/19.  In the first hours of President Trump’s term on 1/20, he issued an executive order (EO) directing the Attorney General (AG) to delay enforcement of the ban on the app for 75 days (through 4/5/25).  The EO is aimed at giving the administration time to “pursue a resolution that protects national security while saving a platform used by 170m Americans.”  In the intervening months, the EO directs the Department of Commerce to assess potential U.S. ownership or control options for TikTok.  It also asserts that “attempted enforcement by the States or private parties represents an encroachment on the powers of the Executive,” a clear attempt to preempt state-level China-hawks from forcing compliance through the courts.  Republicans who are typically closely aligned with Trump (e.g., Sen. Hawley (R-MO)), questioned whether Trump has the authority to issue the order.  And, despite the EO’s assurance of non-enforcement, reports indicate app stores (i.e., Apple, Google) have not restored access or updates to the app (i.e., users who have the app can access its services but cannot update to the latest version, while users who deleted the app cannot redownload it).

* Earlier this week, Trump said he was in discussions with “very substantial people” about buying TikTok and that Microsoft was involved in these discussions.  Reports indicate Oracle, Elon Musk and others are also involved.

* We have begun to see some degree of openness from Chinese officials to “allowing” ByteDance (TikTok’s parent company) to decide whether to sell TikTok.  Previously, Chinese officials had indicated they would “firmly oppose” a sale of TikTok.  However, officials with the Chinese Foreign Ministry recently stated that “when it comes to actions such as the operation and acquisition of business, we believe they should be independently decided by companies in accordance with market principles.”  Separately, reports indicate that the White House is negotiating a deal whereby ByteDance would retain a minority stake.  Close Trump allies, including Sens. Paul (R-KY), Scott (R-FL), and Cramer (R-ND) raised strong objections to the Chinese retaining any ownership stake and said that would be a violation of the law.

* While there is Congressional skepticism/opposition to various aspects of the divestment under consideration (e.g., the U.S. government and/or ByteDance having an ownership stake), we did see a Congressional effort to extend the ban implementation timeline shortly before it was supposed to go into effect (e.g., legislation introduced by Sens. Markey (D-MA), Wyden (D-OR), Booker (D-NJ), Van Hollen (D-MD) and backed by Senate Minority Leader Schumer (D-NY)), as well as Sen. Paul.  Republican allies of President Trump (e.g., Sens. Cotton (R-AR), Ricketts (R-NE)) opposed this bill.

Our outlook… Trump’s motivation level regarding a divestment and the Chinese government’s new openness to it suggest this is the most likely outcome for TikTok’s U.S. operations (55% probability).  To the degree that any deal involves ByteDance retaining an ownership stake, it’s likely to face legal challenges, and could potentially even result in a legislative effort to block it.  The next most likely outcome (25%) is that a deal is not reached by the expiration of the Trump EO’s 75 day timeline, and a ban goes into effect, but that Trump directs the DOJ not to enforce it.  However, in this scenario – as evidenced by app stores still not allowing access to TikTok despite Trump’s extension of the ban deadline – we believe this will amount to a de facto ban, as we expect app stores and ISPs will be conservative and bar access.  The next most likely outcome (20%) is that a ban goes into effect and Trump allows it to be enforced.

* Under the PAFACA, a sale where ByteDance retains an ownership stake would seem to be in violation of the law.  The statute stipulates that a company is “controlled by a foreign adversary” when it is (1) a foreign person that is domiciled in, is headquartered in, has its principal place of business in, or is organized under the laws of a foreign adversary country, (2) a foreign an entity with respect to which a foreign person or combination of foreign persons directly or indirectly own at least a 20% stake, or (3) a person subject to the direction or control of a foreign person or entity.  While a minority stake for ByteDance would address the 20% component, it would seem to do nothing to address the fact that that the minority owners would still be persons or entities located in China and (ostensibly) subject to the control of the Chinese government.

Watch for these developments… To the degree the terms of a potential transaction arise, we are watching for indications Republicans (particularly China hawks like Cotton) are satisfied, particularly regarding any provisions related to ByteDance retaining a minority stake (which it appears they’d be unlikely to support).  If ByteDance insists on remaining involved in the company as a requirement of the deal and Republicans push back on this (as a violation of PAFACA), it will depress the probability of the deal closing and the prospect of the ban taking effect would increase.