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ByteDance's plans to take TikTok public easier said than done – analysts

With the planned sale of TikTok Inc. already facing much uncertainty in the U.S. and beyond, analysts say intentions to take the video-sharing app public could be constrained by the confusion.

TikTok-parent Beijing Byte Dance Telecommunications Co. Ltd. said it is planning an initial public offering for its social app within the next year a move meant to appease the Trump administration, which has aired security-related concerns regarding a Chinese entity retaining ownership of the platform. ByteDance claims Oracle Corp. and Walmart Inc. will jointly acquire a 20% stake in a newly formed U.S.-headquartered company to be called TikTok Global. ByteDance would retain a controlling stake in TikTok ahead of a future public offering of the company.

But Oracle has pushed back against such characterization of the ownership structure, noting this week that, upon creation of TikTok Global, "Oracle/Walmart will make their investment and the TikTok Global shares will be distributed to their owners, Americans will be the majority and ByteDance will have no ownership in TikTok Global."

SNL Image
Source: Pixabay

TikTok has been valued at upwards of $50 billion, and an IPO of the company would count among the tech sector's largest-ever stock market debuts. Analysts, however, note that the forced nature of the deal combined with a lack of clarity around ownership poses risks for TikTok's prospects as a public entity.

"The entire thing is a mess," said Douglas Boneparth, president of financial advisory firm Bone Fide Wealth, in an interview. "I would think this is a very big distraction from what any business should be focused on, which is growth."

ByteDance was pushed into a deal to sell TikTok in August, when U.S. President Donald Trump threatened to ban the app in the U.S. over national security concerns related to the service's data collection abilities. Though Microsoft Corp. made a proposal for a full buyout of TikTok's U.S. assets, ByteDance instead sided with Oracle's offer to serve as the social media unit's "trusted technology provider" in a deal structured as a partnership rather than an outright sale.

ByteDance said while it will not transfer any algorithms or technologies, Oracle will have the authority to check the source code that TikTok uses in the U.S.

Though Trump has agreed "in concept" to Oracle and ByteDance's plans to create a new U.S.-based TikTok service, he indicated this week that he might rescind his blessing if China does not cede control of the app.

ByteDance's paucity of available information around TikTok's financials adds another layer of complexity to these developments, Boneparth noted, raising questions as to how much the company is actually worth.

The parent company has declined to provide details about TikTok's financial performance since its creation in 2016 and has yet to file an S-1 form with the U.S. Securities and Exchange Commission a registration requirement for any U.S. company seeking to be listed on a national exchange.

"We're so far away from the formalities of going public. Everything is pure speculation at this point, how much time can one really spend mulling over what that IPO would look like?" Boneparth said.

Daniel Morgan, a senior portfolio manager at financial service firm Synovus, urged investors to take a measured view of ByteDance's latest plans to take TikTok public, noting that it remains to be seen whether the service has significant staying power in the U.S. or if it is merely a passing fad among younger users.

"That's something that would obviously impact it's valuation, whether this thing is sustainable," Morgan said in an interview.

TikTok recorded 315 million downloads in the first three months of 2020, topping all apps in the world, according to mobile research company Sensor Tower. Total downloads surpassed 2 billion globally.

But amid the political drama, U.S. tech giants such as Facebook Inc. and Alphabet Inc.'s Google LLC have swooped in to launch TikTok competitors. In August, Facebook-owned Instagram LLC launched Reels, which lets users record, edit and share 15-second multiclip videos on their own feeds as well as on the broader Instagram platform. This month, Google's YouTube LLC introduced its own short-form video feature dubbed YouTube Shorts.

Even before the entry of these new players, Sensor Tower said TikTok's competitors had benefited from the uncertainty of TikTok's future. The video-sharing apps Triller, Zynn, Dubsmash and Byte collectively saw nearly 1.5 million installs during the week of July 27 after the White House first threatened to remove TikTok from U.S. marketplaces, up 361% from the week of July 20.

For his part, Wedbush Securities analyst Daniel Ives believes that, despite these latest headaches, allowing TikTok to remain in the U.S. is in the best interest of all parties involved. An approved deal should help Oracle bolster its cloud computing business while providing TikTok with many of Oracle's valuable software resources, he said.

"While the US/China tensions continue across all aspects of the technology food chain, resolving this TikTok and ByteDance standoff and complex Rubik's Cube political backdrop is a relief for tech investors with Oracle in the winners circle" Ives wrote in a report.

The board of TikTok Global will include the founder of ByteDance, Zhang Yiming, the current directors of ByteDance, and the CEO of Walmart, Doug McMillon.