By Gaspard Baroudel, Raphael Berz, Itai Almogy (Yale University), Kevin Lee, Thomas Fujimoto, and Ho Hai Ivan Chung (Hong Kong University of Science and Technology)
Overview of the deal
Investors: Oracle/Walmart
Target: TikTok
Implied Equity Value: TBD (pre-IPO financing to come)
Total Transaction Size: TBD
Closed Date: N/A
Target Advisor: Unclear
At the behest of the US government, ByteDance has agreed to relinquish control of TikTok Inc. in order to avoid an outright ban in the United States over concerns of national security. Oracle intends to take a 12.5% stake in TikTok Global and use its cloud infrastructure to support American users. Walmart appears likely to participate in the deal as well, with a planned 7.5% stake in TikTok. As a "trusted technology partner," Oracle will get insight into the source code and store the data of American users. Risks remain as the transaction is yet to be approved by either government, and the exact details of the deal have yet to be worked out fully.
“I have given the deal my blessing — if they get it done that’s great, if they don’t that’s okay too” - US President Donald J. Trump
Company Details: Oracle
Oracle is a publicly-traded multinational technology company founded in 1977 in California, USA. Its primary focus is enterprise software solutions (SaaS) and cloud computing (PaaS) and it is the second-largest software company by revenue and market capitalization in the world. Oracle is famous for their cross-platform functionality and integrated suite of applications. They have a history of aggressively growing their product portfolio through acquisitions, such as Aconex, DataLogix, NetSuite, MICROS Systems, and more.
Founded in 1977, headquartered in Redwood City, California, USA
CEO: Safra Catz
Number of employees: 135,000
Market Cap: $183 bn as of 9/21/2020
EV: $212 bn
LTM Revenue: $32 bn
LTM EBITDA: $17 bn
LTM EV/Revenue: 6.6
LTM EV/EBITDA: 12.5
Company Details: Walmart
Walmart is an American multinational retail giant, founded by Sam Walton in 1962. The Walton family continues to own a majority of Walmart. The corporation operates over 11,000 stores and clubs, and it is the world’s largest company by revenue, bringing in more than half a trillion dollars annually. It has been publicly traded for nearly 50 years, having been listed in October 1970.
Founded in 1962, headquartered in Bentonville, Arkansas, USA
CEO: Doug McMillon
Number of employees: 2.2 million
Market Cap: $388 bn as of 9/21/2020
EV: $448 bn
LTM Revenue: $542 bn
LTM EBITDA: $37 bn
LTM EV/Revenue: 0.8x
LTM EV/EBITDA: 12.1x
Company Details: TikTok
TikTok, known as Douyin in China, is a social media platform for creating and sharing short videos, ranging from 3 to 60 seconds. It was developed and is owned by ByteDance, a Chinese multinational technology giant. The platform was launched in China in 2016 and expanded overseas in 2017. In 2018, after merging with another Chinese social media platform, Musical.ly, TikTok became available worldwide. TikTok (excluding Douyin) has nearly 700 million users and has recorded over 2 billion downloads worldwide.
Founded in 2016, headquartered in Beijing, China
CEO: Vanessa Pappas (interim)
Number of employees: 1,400
Valuation: $60 bn (target)
Projections and Assumptions
“Oracle will quickly deploy, rapidly scale, and operate TikTok systems in the Oracle Cloud. We are a hundred percent confident in our ability to deliver a highly secure environment to TikTok and ensure data privacy to TikTok’s American users, and users throughout the world.” - Oracle CEO Safra Catz
Short-term consequences
Unlike most transactions that are driven by the unlocking underlying synergies, the TikTok and Oracle/Walmart partnership is largely driven by political pressure, Oracle's stagnated revenue, and Walmart’s ambition in the online advertisement space. On one hand, the underlying value creation potential for Oracle is questionable, and could potentially be value destructive for the commercial partnership. On the other hand, the partnership also symbolizes a large step for Walmart breaking into the technology areas.
Oracle has announced that TikTok has chosen it as their secure cloud technology provider, generating revenue and publicity for the company. Oracle has other assets and resources that could benefit from the TikTok investment, including marketing software, which could help TikTok more effectively analyze data that it collects from users. Importantly, owning and providing the infrastructure behind a social media company could allow Oracle to develop better products for other social media players, potentially creating future revenue streams. Oracle has struggled amid the tech industry’s secular shift to cloud computing from traditional on-premise deployments. The company is shrinking, with sales down 6% year over year during a time when revenues of many cloud-software companies are growing at double-digit rates. As much as Oracle is trying to market itself as a leading cloud player, the numbers show that it is still a legacy software vendor at its core. Partnering with TikTok could help Oracle revitalize its business, and assuming TikTok successfully monetizes its service, the value of their minority stake could appreciate significantly (although if priced at $60 bn, there may be limited upside).
Retail giant Walmart is a seemingly odd company for TikTok to partner with. However, the deal could be an incredible success for Walmart. The partnership with TikTok, a social media company specifically known for its popularity with younger generations, may grant Walmart significant insights and data on tomorrow’s consumers. With 50 million U.S. daily users, the engaged young consumer base could be a new driver to Walmart’s future growth. It remains to be seen how exactly the two companies’ commercial partnership will pan out, but it is a striking sign of modernization for the brick-and-mortar store titan.
Long-term Upsides
TikTok's continued success is brought by the growing user base across the years. Its business model of short-form video with diversified content has been a unique selling point in the social media industry. Yet, TikTok’s future growth may be constrained by privacy issues and political problems.
In the long-term, TikTok’s user experience and content are expected to remain similar. After all, TikTok’s staggering increase in active users and downloads has been mainly driven by the vibrant community, interaction among users, and incredibly effective algorithm. Other than allowing TikTok to continue operating in the United States and alleviate privacy concerns to an extent, this deal will likely leave the social media company the same. As for Oracle, the partnership with TikTok may allow the company to leverage users’ data. However, it is unclear what level of access the firm will have to TikTok’s data, and any failure or data breach could be devastating to both companies’ reputations.
The future growth of TikTok may be more limited than expected. Currently, the adoption of new social media platforms tends to flow through a continuous cycle. In the current market landscape, TikTok targets people under 25, Instagram is popular among 20-40 years old, and Facebook’s major users are 40+. Thus, presumably, TikTok will reach a point when its user growth plateaus and it may be replaced by new forms of social media. If it does, TikTok may no longer be as popular as it is now among young generations. It is important for Oracle, Walmart, and ByteDance to emphasize user retention to ensure a smooth transformation from a high-growth platform into a mature social media giant.
As for Walmart, the company is taking on minimal risk, with the potential for significant upside through the commercial partnership. Effectively using TikTok to access data of younger consumers and increasing Walmart’s online presence could generate increased revenue, longevity, and popularity for the firm. Additionally, as Walmart’s first serious foray into technology, the company could redefine itself in the years to come as it begins to pivot to counter e-commerce titan Amazon. Overall, the deal appears to be a low-risk, potentially high reward decision for Walmart.
According to the latest reports, ByteDance would still retain a majority stake in TikTok. This poses a serious political challenge. Although deal terms will be finalized in the short run, the US government may pressure TikTok to change its shareholder structure, operating model, or geographical coverage, perhaps hindering TikTok’s future development.
Risks and Uncertainties
There are many clear risks associated with the proposed deal, both to the deal itself and to the companies. First, and most importantly, the deal has yet to be closed, and in this environment, it is unclear whether or not it will go through. As of September 21st, it is difficult to assess, as, despite US President Donald J. Trump’s verbal tentative approval, he has also been vocal about preventing ByteDance from retaining control. As of now, the deal will leave ByteDance with a majority stake in TikTok Global. Trump himself is at the root of the deal -- he had previously threatened to ban TikTok from the US-based on national security concerns raised by the Committee on Foreign Investment in the United States (CFIUS) surrounding Americans’ data being compromised or misappropriated.
As for other risks -- it is difficult to accurately price TikTok, although Oracle and Walmart will be given access to much more data than the public as potential investors. There are factors pushing TikTok’s valuation in both directions, which could potentially lead to the company’s US business being over or undervalued. The publicity and attention that the app has received, in addition to incredibly high tech valuations in the US stock market, may lead investors to buy in at an unreasonably high valuation. However, the US government’s action in forcing TikTok to sell creates downward pressure on the valuation, as investors understand that ByteDance has no alternative other than to give up TikTok’s US business, which would be a massive loss. Recently, it has been reported that ByteDance is targeting a valuation of $60 bn for TikTok, requiring Oracle and Walmart to invest a combined $12 bn.
Ownership of and access to the famed TikTok algorithm -- popular for the well-known “For You Page” -- is up in the air. It is perhaps the most important and unique piece of the business, providing users with an endless supply of personally-curated content. Relevant to this is the Chinese government’s recent expansion of export restrictions: these now include “recommendation of personalized information services based on data analysis,” clearly targeting ByteDance’s prized algorithm. The details of the deal are still yet to be worked out in full, and the recommendation algorithm will be an essential piece.