By Aaron Tilley
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 4, 2020).
If there is one trait that would link a TikTok acquisition with the other big deals Microsoft Corp. Chief Executive Satya Nadella has done, it is his willingness to pay big bucks to expand the software giant's universe of users.
Getting new users is one thing, linking them into a cohesive business strategy is another. As Microsoft negotiates with TikTok's Chinese parent over a possible deal to buy the app's operations in the U.S. and a few other countries, Mr. Nadella and his lieutenants also must plan how to leverage the youth-focused video-sharing platform into a company heavily focused on serving corporate users. Analysts point to several ways they could do that.
Since taking over six years ago, Mr. Nadella has paid $2.5 billion to buy the maker of the "Minecraft" videogame, about $26 billion for the professional networking site LinkedIn, and $7.5 billion for the coding-collaboration site GitHub Inc. Those deals collectively included hundreds of millions of users.
TikTok would bring another 100 million or so U.S. users, most of them young, and a business focused on digital advertising. Microsoft does have an existing pool of younger users through its Xbox videogame business. And, though it gets scant attention, Microsoft has a substantial ads business, thanks to its Bing search engine: the company said $7.7 billion of its $143 billion in total revenue for the fiscal year through June came from search advertising.
TikTok globally isn't profitable. Beijing-based ByteDance Ltd., TikTok's parent, projects the app will have $1 billion in revenue this year and $6 billion next year, said a person familiar with the matter. The U.S. historically has accounted for about a tenth of TikTok users, though that group is generally considered more valuable to advertisers.
While ads in TikTok operate differently than those on Bing, "Microsoft is better positioned to help TikTok achieve its revenue potential than many other companies," Ben Thompson, a tech industry analyst, wrote in his Stratechery newsletter Monday.
TikTok also would deliver more of the young, enthusiastic kind of users that have propelled growth in Microsoft's Xbox gaming business. And they would arrive as videogames increasingly function as social-media networks with real-time interaction among players.
Investors seem confident that Mr. Nadella can pull off a successful deal. Microsoft's stock rose 5.62% in Monday trading.
"If Microsoft can close a deal it would undoubtedly be a huge win," said Robert Majek, analyst at Raymond James & Associates, calling TikTok a trophy asset.
Still, much about a potential deal remains unclear -- not least how much Microsoft would pay. Neither it nor ByteDance have disclosed potential deal terms, though industry analysts say it has the potential to top LinkedIn as Mr. Nadella's bigger-ever acquisition. President Trump on Monday said the U.S. government should receive payment for clearing a purchase.
A deal could still fall through. Following a week of head-spinning twists and turns that culminated in a phone call between Mr. Nadella and the president, Microsoft on Sunday said it was committed to pursuing the acquisition of TikTok's operations in the U.S., Canada, Australia and New Zealand -- but also warned that discussions were preliminary and that there was no certainty that a transaction would be completed. Microsoft said it would conclude talks by Sept. 15.
The Redmond, Wash.-based company would have to invest in TikTok to address cybersecurity, privacy and other technology issues, while also shifting the service onto its own Azure cloud-computing system, Bernstein Research analyst Mark Moerdler said Monday. "This could be a complex and resource intensive process."
And Microsoft would take on a deep-pocketed rival. Facebook Inc. plans to launch its own video-sharing app, called Instagram Reels, as a rival to TikTok. The social-media giant has already shown its willingness to spend to make Reels a success, offering financial incentives to lure influential TikTok users to its platform.
The deal could also jeopardize some of Microsoft's business in China, which has bristled at the U.S. government's actions against TikTok. China has long been a frustrating market for Microsoft, which has said it represents less than 2% of sales, though the company has enjoyed successes, selling its software to the Chinese government and winning business for its booming cloud-computing service.
The interest in TikTok has surprised investors after years during which Mr. Nadella principally focused on growing Microsoft's business customers, a strategy that revived the company's fortunes and has propelled its market valuation beyond $1.6 trillion.
Mr. Nadella has done 161 deals since taking over in 2014, spending around $54 billion, according to Dealogic. The company still has ample money to spend: it closed the latest financial year with more than $136 billion in cash or otherwise easy-to-tap funds. Microsoft has said it may invite other American investors to take a minority stake in the TikTok operations it is pursuing.
The deal for Minecraft's maker, Mojang AB, came only a few months into his tenure. At the time, Minecraft had sold more than 50 million copies since its initial release in 2009. Under Microsoft, sales doubled by 2016 and hit 200 million games in the financial year just ended. Microsoft doesn't disclose revenue by game, though Minecraft has been part of the company's successful Xbox gaming product line that saw revenue increase 65% year-over-year in the last quarter.
When Microsoft bought LinkedIn two years later, the service had more than 400 million registered users and growth was slowing. That turned around under Microsoft. The professional network now has more than 706 million users with revenue growth, in recent years, as high as 37% -- though its business has suffered during the pandemic, as the economic slump cuts into the revenue it gets from recruiting services.
GitHub has also grown since Microsoft bought it in 2018. GitHub user numbers swelled from 28 million when Microsoft bought the company to more than 50 million users today.
Though many details around the TikTok deal remain uncertain, analysts said Mr. Nadella's record built on past billion-dollar bets such as Mojang, LinkedIn and GitHub has been strong. "Nadella has been a far better acquirer than Microsoft has been since the [Bill] Gates days," said Mr. Moerdler.
Write to Aaron Tilley at email@example.com
(END) Dow Jones Newswires
August 04, 2020 02:47 ET (06:47 GMT)