Who Buys TikTok?

The bill that would either entirely ban or force the sale of TikTok by Chinese-owned ByteDance passed with support from 79% of the Senate and 81% of the House. It was then signed by President Biden last week on April 24th. This law allows TikTok to continue to operate in the US if it is sold within 270 days (or up to 1 year if extended by the President). Otherwise, the earliest a ban could start is January 2025 (with extension, April 2025).

TikTok's CEO, Shou Zi Chew, has stated that the business is mounting their defense and intends to fight to keep their platform operations and current ownership structure. Outside of this statement, there have been rumors for alternate paths including the divestiture and sale of TikTok’s US operations, a US-instated ban, or a TikTok-instated exit from the US.

The Context of a Potential Acquisition

The cost of a potential TikTok acquisition is anticipated to be very high. In 2023, global ByteDance revenue has been estimated at $120b (+40% YoY). Note that this number includes ByteDance-owned Douyin, the TikTok clone that only exists in China. For context, Meta reported $135b in revenues in 2023 (+16% YoY).

When looking specifically at the US, TikTok revenue is estimated to be $16b (or ~13% of global ByteDance revenue). When looking at similar comps (Meta, Snap), this puts the value of the US share of TikTok business to be anywhere between $60-$150b (3.75-9x revenue).

In addition to the high price tag, a potential acquisition becomes even more difficult due to the macro environment. Interest rates are at a multi-year high, making debt financing less appealing and limiting buyers to the major players with large cash balances.

This week, we will not speculate on the likelihood or justification behind either ban or an acquisition. It is clear that the decision and company statements immediately following are only the beginning of a contentious and imminent legal battle. Instead, we will focus our attention on highlighting companies whose strategies, core competencies, and business models are aligned with TikTok to contend as viable acquirers or partners.

Potential Buyers: Tech

Potential acquirers:

• The obvious (Meta, Google, Twitter/X): The two companies with the most strategic alignment (as well as the strongest balance sheets) are Meta and Google. Each player has either acquired or built out their own platforms within social, video entertainment, and advertising - Meta owns Instagram and Facebook, and Google bought YouTube.
  

• We have seen complimentary acquisitions done by Twitter/X in the past: Vine, a TikTok predecessor, was acquired in 2012 (shut down 4 years later). Much has happened since then at Twitter/X - after being acquired and taken private by Elon Musk in 2022 for $44b, the valuation of X has dropped 72% since acquisition. While TikTok’s business model is complementary and even expansive, it is highly unpredictable whether Elon would consider making an offer to buy TikTok (we see it as unlikely).
  

• While everything makes sense on paper for an acquisition by any of these three players, the FTC would likely sue for anti-competitive or monopolistic reasons.
  

• Likely “no’s” (Apple, Netflix, Nvidia): There are certain players who, despite having strong cash positions, should be excluded from the conversation as potential acquirers for strategic reasons. Apple does not do these types of acquisitions and does not own many apps themselves, let alone any that operate outside of the iOS ecosystem. When it comes to discovery and advertising, they have preferred to build versus buy.
  

• While TikTok has helped drive traffic to Netflix, Netflix does not have a core competency in social networks or e-commerce (which is important, more on this later). While a strong revenue contributor, Netflix’s ad network ($500m in 2023) is tailored to their own platform (exclusive to top brand partners).
  

• Nvidia’s only consumer play (GeForce Now, cloud gaming) is complementary to their core competencies and main drivers for their business: data center processors (primarily for analytics and AI) and GPU manufacturing. Given their limited consumer DNA and nonexistent social strategy, we believe Nvidia is unlikely to entertain submitting a bid.

Our non-gaming favorite of the technology giants is Amazon: TikTok Shop is still a relatively new feature of the platform (launched in September 2023), however, it is speculated that the US business line alone is looking to grow to $17.5b this year (Bloomberg). TikTok Shop allows creators tag products for users to buy through in-feed or live videos and takes a fee (increased from 2% to 4% in April 2024, will increase to 8% on July 1, 2024). For context, Amazon’s fee is, on average, 15% and their net e-commerce revenue in 2023 was $574.8b (+12% YoY).

In addition to e-commerce, Amazon also owns Twitch and has experience operating a video and live streaming platform. They also recently announced that Twitch is launching a short-form video feed that will look to compete with TikTok. We believe that this is an experiment to see if they can effectively build an in-house solution that can compete cost-effectively with TikTok. We believe this will fail given a majority of content consumption on Twitch is gaming-related and the platform will not appeal to a majority of TikTok creators and users. After a trial period of their in-house solution, we believe Amazon will return to the top of the list for potential acquirers of TikTok.

Potential Buyers and Partners: Telecoms, E-commerce, Advertising

There are a few other industries with strategic alignment to what TikTok has to offer as a social network, advertising channel, and e-commerce platform:

Telecoms/Media (e.g., Verizon, Comcast, AT&T): At the end of the day, everything from cable TV to social media to gaming are all competing for consumer attention. Telecom companies have in recent years expanded outside of traditional networking to streaming services. An acquisition of TikTok would mean that these groups, who traditionally appeal to older demographics, could tap into 64% of the US Gen Z demographic with one acquisition. However, these telecom giants are not known for their activity in industries that are potentially volatile and have made smaller adjustments to expand into sub verticals such as streaming. These players have even been historically hesitant to invest heavily in gaming, a ~$200b and growing industry. We think that TikTok’s future is likely going to be highly volatile, making it unfit for telecom giants to acquire.

E-commerce (e.g., Rakuten, Shopify, Walmart): As we mentioned earlier, the TikTok Shop feature enables creators to tag items in their videos to be sold directly to users. This has the potential to be a strong driver to a group like Shopify, whose commerce platform lets anyone start, manage, and grow a business. Note that given their cash position (~$5b) and market cap (~$100b), Shopify would likely be a strategic partner versus an acquirer.

TikTok Shop’s business model is very similar to that of Japanese conglomerate Rakuten (our favorite potential partner for this category), who has ~$33b in cash and cash equivalents. TikTok also has the potential to be advantageous for more “traditional” retailers such as Walmart, who has been in conversations as a potential acquirer (in partnership with Oracle) before.

Advertising (e.g., AppLovin, Unity, Snap, advertising agencies such as Detsu and IPG): To date, advertising has been the core revenue stream for TikTok and it strategically makes sense for a strong player with an ads-driven business model and core competency to be part of the conversation. However, when looking at the potential acquirers in this category, it is clear that cash on hand and leverage to garner capital (high debt, inconsistent profitability) are the biggest barriers.

Additionally, Snap is the only player in this category with B2C experience. Given their weak cash position ($1.8b) and unprofitability, it is much more likely that Snap tries to take advantage of the chaos to recover market share (unlikely given that over the next 9-12 months, TikTok will continue to operate as usual). While advertising is a core competency of groups like AppLovin, Unity and Detsu, they are all more likely to be considered potential partners of a future acquirer of TikTok than an acquirer themself.

Gaming

As we mentioned in our quarterly report, TikTok is important to the gaming industry as it is a very strong, cost-effective, and accessible user acquisition channel. We believe that alongside TV/film and e-commerce, gaming is in the top three most complementary industries to TikTok, and that gaming companies best understand and actively flex the dynamics of every component of TikTok’s business model.

However, there are very few targets that have the purchasing power to acquire the US operations of TikTok. A majority of the top AAA publishers are not diversified enough outside of games (e.g., EA, Ubisoft, previously Activision Blizzard) to be an ideal strategic partner, let alone generate a strong enough cash position to afford TikTok.

Trending groups in the industry like Roblox and Epic (focused on building out UEFN and their Disney partnership, as well as fighting with Apple on distribution and payments) have low strategic alignment with ingesting such a broad social network in the near future. Console and distribution giant Nintendo actively minimizes child safety risks via their peer-to-peer / siloed multiplayer design and does not do these types of acquisitions.

Our Favorites Within Gaming are Microsoft and Sony:

• Sony: The US and Japan have a history of committed collaboration and partnership in technology (which was recently reaffirmed in February 2024), making an acquisition from a large Japanese conglomerate ideal in solving the core issues with today’s US TikTok operations. We believe that Sony has the highest strategic alignment out of any gaming company. While they lack experience in operating a social network, ad network or a major streaming service (Crunchyroll is anime-specific), Sony has the most complimentary business lines in film/TV (Sony Pictures), music (Sony Music Group), and gaming (Sony Interactive Entertainment which includes PlayStation).
  

• Microsoft: Microsoft is distinctly moving away from its historical strategy of having content exclusive to their Xbox ecosystem. Instead, the company is now focused on player experience over content lock-in (alleviating monopolistic concerns is also a major driving factor behind this strategy). This user-centric approach is complementary to the TikTok ethos (access to both creation and consumption for anyone). While Microsoft is less known for non-productivity consumer applications, their “ecosystem” approach is strategically aligned with where TikTok is headed.

Lastly, a likely path worth mentioning is a private equity buyout. Private equity firms or other investors could form a group to raise enough money to buy TikTok. Former Treasury Secretary Steven Mnuchin said in March that he wanted to build such a group. That said, anyone with enough capital for the acquisition still has to pass through a process with the US government, which needs to sign off on any purchase.

Takeaway: As the saga around TikTok's future in the US unfolds, the recent signing of a bill that forces either a sale or potential ban underscores the platform's uncertain trajectory in the United States. Amid speculation on potential outcomes, very few targets rise as potential acquirers. While tech giants like Meta, Google, and Twitter present strategic alignment, intense FTC scrutiny in recent years will likely dispel any action by these groups. Amazon is the most formidable contender for an acquisition (assuming their recent TikTok-like features within Twitch fails), and has complementary strategic alignment and core competencies in e-commerce.