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 (September 16, 2020).
Microsoft Corp. Chief Executive Satya Nadella suffered a rare
defeat in his company's failed pursuit of viral video app TikTok.
That doesn't mean he's done hunting for the tech giant's next big
While the pursuit of a social-media app with little connection
to Microsoft's core business surprised many observers, those who
follow the company closely say it reflects Mr. Nadella's desire to
find new segments of technology to help it sustain the business
momentum and soaring stock price under his tenure.
"Microsoft needs to take a look at every big opportunity in
tech," said Stifel Nicolaus analyst Brad Reback. "To sustain
double-digit growth of this size in the long term, they will
absolutely need to tap new markets."
Even before the prospect of buying TikTok emerged, Mr. Nadella
had been hunting for a future growth driver to follow his massively
successful bet on cloud computing, according to a person close to
him. Mr. Nadella's next target may very well not be a social-media
company, but in other ways would reflect his driving idea of
finding new customers and users to attract into Microsoft's
Snagging TikTok's U.S. operations, which face a threatened ban
by the Trump administration over national-security concerns, would
have represented the latest in a string of big deals Mr. Nadella
has undertaken to expand Microsoft's user base. It would also have
expanded Microsoft beyond from the corporate customer focus he has
emphasized, adding some 100 million mostly youthful users and
potentially augmenting consumer-facing products such as the Xbox
Mr. Nadella's prior big acquisitions, the professional
networking site LinkedIn, the coding-collaboration platform GitHub
Inc., and videogame developer Mojang AB, owner of "Minecraft,"
added millions of users.
But ByteDance Ltd., TikTok's Chinese parent, jilted Microsoft on
Sunday after weeks of tumultuous talks between the companies, the
White House and Chinese government -- opting instead to join with
Microsoft rival Oracle Corp.
The talks with ByteDance showed Mr. Nadella's interest in a bold
move even when it comes with risks. The TikTok negotiations put
Microsoft very publicly at the center of the unfolding tussle over
technology leadership between the U.S. and Chinese governments.
The low-key CEO personally lobbied President Trump for the deal
in a phone call in early August, and the company said it was
committed to satisfying the administration's national-security
concerns as part of any deal. Microsoft's involvement also risked
the ire of China's government, which has bristled at U.S. pressure
on TikTok to sell.
In a terse statement after losing, Microsoft defended its
careful handling of security, privacy, safety and other
considerations, and said: "We look forward to seeing how the
service evolves in these important areas."
Some Microsoft investors say missing out on TikTok has upsides.
"I'm actually relieved that they didn't win it," said Kevin
Walkush, a portfolio manager at Jensen Investment Management, which
owns nearly four million shares in Microsoft. "I think it would
have added complexity to the business," he said, adding there was
no clear path for the company to make money to recoup what was
expected to be a multibillion-dollar investment.
But it leaves the question of what comes next.
Mr. Nadella concentrated Microsoft largely on courting
enterprise customers after he took the top job in 2014 following a
period in which the company repeatedly stumbled in the consumer
market. That emphasis revived the software giant's fortunes and has
lifted its shares. Microsoft's stock is up fivefold since Mr.
Nadella ascended to the CEO role. Shares are up more than 30% this
The cloud business's potential remains bright, but growth has
begun to slow, in part reflecting the reality that the business has
gotten huge -- it represented more than one-third of Microsoft's
$143 billion in total revenue in the year through June 30. Sales
growth for Azure, Microsoft's principal cloud product, fell below
50% in the most recent quarter.
"Anything that could drive a long-term growth story or positive
disruption story is on the table," said Mark Moerdler, a senior
research analyst at Bernstein Research.
Microsoft has ample cash to pursue other growth prospects and
Mr. Nadella has before shown he is willing to splash out to fuel
growth. Shortly after Mr. Nadella became CEO, he paid $2.5 billion
to buy the maker of "Minecraft." Two years later he followed with
Microsoft's biggest deal ever, the roughly $26 billion purchase of
LinkedIn, and then spent $7.5 billion for GitHub. The company,
midyear, sat on $137 billion in cash.
Where Mr. Nadella may choose to strike is uncertain. "I've been
saying for a while that when Microsoft makes its next big
acquisition, I'm going to scratch my head over it for a while,"
Bernstein's Mr. Moerdler said, adding TikTok was just such an
Investors don't see any urgency for Mr. Nadella to act. Mr.
Walkush still sees healthy earnings and plenty of cloud-growth
potential. "They're not in a position where they have to make an
acquisition," he said.
Write to Aaron Tilley at firstname.lastname@example.org
(END) Dow Jones Newswires
September 16, 2020 02:47 ET (06:47 GMT)
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