App's Chinese parent agrees to security measures, but Trump wants U.S. ownership

By Sarah Nassauer, Michael C. Bender and Andrew Restuccia 

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 18, 2020).

Backers of a proposed new group to take over Chinese-owned video-sharing app TikTok are working to create an ownership structure that would give U.S. interests a majority stake, in an effort to ease the Trump administration's security concerns.

Under the latest plan for TikTok, Oracle Corp. and Walmart Inc. could together own a significant stake, according to people familiar with the situation. That move, if combined with existing American investors, could put majority ownership in U.S. hands, the people said.

Walmart Chief Executive Doug McMillon is expected to get a board seat if the deal goes through, said some of the people familiar with the matter. As part of the current plan, TikTok would file for a U.S. initial public offering in about a year, said one of these people.

Walmart, which previously looked to join with Microsoft Corp. on a TikTok deal, has been looking to ramp up its online presence to generate new revenue streams.

Trump administration officials have pushed for majority U.S. ownership of TikTok, which is owned by Beijing-based ByteDance Ltd. That goal could be met under the proposal for Oracle alone, or together with Walmart, to take significant ownership stakes.

Their participation, together with existing U.S.-based ByteDance investors like Sequoia Capital, General Atlantic and Coatue Management LLC, could push U.S. ownership in the new entity above 50%.

The situation is highly fluid and it is unclear what the final terms of any deal would ultimately be. Mr. Trump and Chinese authorities must also sign off on any deal.

Mr. Trump told reporters at the White House on Thursday night that the administration had conversations earlier Thursday with representatives from Oracle and Walmart.

"I guess Microsoft is still involved," Mr. Trump said, without offering any details. "We'll make a decision."

Microsoft Corp. said Sunday that its bid for TikTok was rejected by ByteDance, and a person familiar with Microsoft's decision making said Thursday it is no longer involved in the talks.

ByteDance and Oracle previously announced their partnership, with Oracle providing cloud and data services for a restructured TikTok to be based in the U.S.

In a conference call Wednesday night, ByteDance officials agreed to significant strengthening of the data security and data management aspects of the proposal, according to a person familiar with the matter. Treasury Secretary Steven Mnuchin participated in the call, this person said.

The 20-page agreement, highly technical in nature, amounted to a Treasury counterproposal on the security issues, the person said. Those had emerged as the most significant concerns in the TikTok negotiations for some China hawks, even overshadowing the issue of corporate ownership and control.

ByteDance has also agreed to allow Oracle to review TikTok's source code and software to ensure there are no backdoors that allow the Chinese government or other entities to access the data, according to other people familiar with the matter

Mr. Trump on Wednesday expressed discomfort with any agreement that leaves ByteDance with majority ownership of the company's U.S. operations. "Conceptually, I can tell you, I don't like that," he told reporters.

Those reservations were echoed publicly on Thursday by White House chief of staff Mark Meadows, who cautioned that a transaction that leaves the company Chinese-controlled might not meet the president's standards.

"My big concern is if all we're doing is repackaging it and still keeping it as a predominantly Chinese government-run company, that would not set well with the original goals the president outlined," Mr. Meadows told reporters at the White House.

Mr. Meadows said the administration is still reviewing the details of the agreement.

Speaking at an online webinar on Thursday, National Economic Council Director Larry Kudlow said the president was reviewing all options.

"The deal and its many aspects are being reviewed very, very carefully by economic and national security processes," he said at the event, hosted by the Economic Club of New York.

In an August executive order, the White House effectively gave ByteDance a 45-day deadline to sell or restructure its U.S. TikTok operations or face a ban over the perceived security risk.

The administration contends that the data TikTok collects from U.S. consumers could be shared with the Chinese government. TikTok has said it would never hand over such data.

The Journal reported Wednesday that Trump administration officials were working toward a structure that would give American investors and companies a majority share of the company that will take over TikTok.

Some of the investors have had preliminary discussions with Instagram co-founder Kevin Systrom about running the new company, according to a person familiar with the matter. Mr. Systrom left Instagram in 2018, six years after selling his app to Facebook Inc. The approach was reported earlier by the New York Times.

Chinese authorities will have to approve the terms of the deal, Bytedance noted on Thursday -- so any deal struck by Oracle and ByteDance would face scrutiny from Beijing as well as the White House.

ByteDance will also face scrutiny from Chinese regulators if its artificial intelligence-driven content-recommendation engine -- the algorithms widely acknowledged to be vital to its success -- is found to fall under the scope of an updated technology export-control list.

China's ministries in charge of commerce and science and technology added such algorithms to an export-control list on Aug. 28. This means the social-media company may have to seek approval from local commerce authorities before exporting its technology overseas.

One factor that may ease Chinese approval is that Mr. Trump has dropped the demand late Wednesday for a payment to the U.S. Treasury. That was seen internally in ByteDance as helpful to getting Beijing to approve it, people familiar with the situation said.

The issue wasn't a major factor in an agreement, but the condition was considered an added hurdle. Chinese authorities saw the demand as bullying, one of the people said, making it troublesome symbolically.

--John D. McKinnon, Georgia Wells, Miriam Gottfried and Deepa Seetharaman contributed to this article.

Write to Sarah Nassauer at sarah.nassauer@wsj.com, Michael C. Bender at Mike.Bender@wsj.com and Andrew Restuccia at Andrew.Restuccia@wsj.com

 

(END) Dow Jones Newswires

September 18, 2020 02:47 ET (06:47 GMT)

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