Somewhere in the United States this weekend, a large number of Oracle bankers and lawyers are almost certainly eschewing relaxation for a stressful weekend of zoom calls, diligence and negotiations. I don't envy them.
At the strange intersection of Fukuyama-esque geo-politics, high finance and viral videos of lip-syncing teens and dancing grandmothers, they have been given a difficult task - pulling off an acquisition of the US operations (and maybe others) of viral Chinese social media upstart TikTok before a deadline sent straight from the White House itself.
Time is ticking...
For the uninitiated among us (including 30-year olds like myself), TikTok is a video-sharing app owned by Chinese tech company ByteDance.
Focusing on short, often humorous snippets of video set against music, TikTok has made millionaires out of teenagers such as Charli D'Amelio, while blue-chip brands such as the NFL and Pepsi have scrambled to build out influence on the platform and sign endorsement deals for one of the most important advertising mediums of the day.
At the core of the TikTok experience is an algorithm that weighs all your viewing decisions in order to curate content that is catered to your preferences. Your comments, your location, music choices, and the genres of TikTok videos you like — they can all influence the TikTok algorithm, and what content you see.
And with over 2 billion app downloads worldwide, you best believe that dancing grandmas are now serious business too.
For visual learners.
Oracle now appears to be the designated dance parter. As I parse through my daily business news feed, I couldn't help but think, what does it even mean to buy TikTok?
The Art of Most Deals
When you represent a purchaser in an acquisition, you have a few overarching objectives as legal counsel.
First, you need to help your client identify what attributes of the target drives value, and ensure that you are acquiring this attribute.
If you're purchasing a real estate company, you'd be remiss to acquire all of the shares of the company - but come out of the deal without possession of the underlying leases or important title in land. Conversely, if you're acquiring a technology company, it would be a failure if you came out with possession of all their computers, land and chattel, but without the IP or key technical personnel necessary to run the business. In summary, you need to come out not just with a handful of eggs, but the golden goose itself.
Second, you need to identify and allocate the risks associated with an acquisition.
In parallel with the above, you need to help clients allocate (or get comfortable) with various types of legal and business risks. Risks can be allocated through legal means (representations and warranties, carve-outs to such via the disclosure schedule, or providing indemnities against certain risks) or via structural and transactional means (earn-outs or clawbacks to the purchase price, escrows accounts and baskets established to pay out post-closing liabilities, break fees or reverse break fees if the deal goes sideways etc.). However, other risks cannot be fully contained and are simply things the company needs to understand and be comfortable with.
Risks cover the whole spectrum, things like:
Legal - Is the company's minute book complete? Have all important actions been properly documented and authorized? Does the company have the corporate authority to enter or perform the agreement (via the articles, bylaws or shareholder agreements)? Do any consents or notices need to be acquired prior or after the deal?
Employment - Are you susceptible to employment claims from any post-merger layoffs? Do you have a grasp of pension liabilities (if you inherit them) or severance owed? Do you have non-compete agreements in place for personnel, or if there are ones in place, are they even enforceable?
Litigation - Has the company been sued? What litigation is the company embroiled in? Has the company been released from all claims?
Financial - How much will your tax liability be? Who will assumes these liabilities? Who will inherit existing cash and debt? How will post-closing adjustments be calculated?
IP - Is there IP protection in place? Who owns the IP? What jurisdictions does it cover? Could other parties (suppliers, employees, customers) have claims to such IP?
Competition and National Security - Does the deal violate competition laws? Will it implicate national security reviews (from CFIUS or elsewhere) that could unwind the deal pre or post-closing?
TikTok's Global Footprint, Intellectual Property and Social Influencer and Creator Network Makes it a Pain in the A$% to "Acquire"
Unlike physical business (stores, factories etc), TikTok is a global app, one that doesn't lend itself well to "spinning out" it's US business versus the rest of its global business. Indeed, log onto TikTok these days (I know I have) and you're just as likely to see a South Korean viral video as you are a US one.
The golden goose of TikTok is both its match-making algorithm as well as the key influencers who produce popular content on the platform. Can these simply be "acquired"? What does that even mean?
First and foremost, TikTok considers itself an AI company. By all accounts, its hyper fast-paced matchmaking algorithm and machine-learning models, paired with a global reservoir of user data that it draws upon, is what allows the platform to be so addictive. By carving out its US business, tricky questions are raised about ownership of this algorithm, which by all accounts was created in China by Beijing Bytedance employees. How will you untangle these employees (who have necessarily seen, touched and contributed to this code) from the US business? Where will user data be stored and who will be allowed to access it? Will ownership be transferred or will there be some sort of licensing arrangement? Furthermore, even if transferred, will the algorithm even be the same if it cannot draw upon its global reservoir of user preferences?
Second, any acquisition of TikTok must ensure that key influencers and creators are retained. Already, Instagram is dangling multi-million dollar offers to key influencers for its competitor product. Unfortunately, these people aren't "employees" of the company that can simply be signed up under new employment agreements. While central to the platform, they are free-willed individuals who choose to use the platform for its viral popularity and massive global reach. Will that change?
Lastly, the TikTok acquisition leaves so many risks that cannot be quantified. With a President who views himself as king-maker as much as deal-maker, and a Chinese government that has formulated its own response, the acquisition is framed against global political players outside the control of the companies and deal teams. Don't even mention the looming US presidential election. Given the stakes, there must be a giant break fee in place.
I'm excited to see how this will all play out.
Heck, I might even sign up for an account.
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