Last week, as leaders in Silicon Valley, China and Washington raced to seal the fate of one of the world’s fastest-growing social media companies, a shouting match broke out in the Oval Office between two of President Trump’s top advisers.
Navarro pushed back, demanding an outright ban of TikTok, while accusing Mnuchin of being soft on China, the people said, speaking on the condition of anonymity to discuss private discussions freely. The treasury secretary appeared taken aback, they said.
The ensuing argument — which was described by one of the people as a “knockdown, drag-out” brawl — was preceded by months of backroom dealings among investors, lobbyists and executives. Many of these stakeholders long understood the critical nature of establishing close connections with key figures in the Trump administration.
But over the past few weeks, they also were reminded of the unpredictable and precarious nature of business dealings under a Trump-led government — and how the winner of a heated debate in front of the president could help decide the fate of a multibillion-dollar deal that may reshape the technology business landscape for years to come.
Over the past two weeks, TikTok’s future has been publicly tossed about, first as it appeared the president would agree to a sale, then that he would ban it outright, then that he would allow a sale again — but only if a fee were paid to the U.S. Treasury.
Behind the scenes, an enormous amount of scrambling has happened in response to each twist and turn. And an executive order signed by the president Thursday night while on Air Force One — which would essentially shutter the U.S. operation of TikTok in 45 days unless it was sold — has sown more confusion about the future of one of the fastest-growing social media start-ups in the world. Few on the East or West coasts knew the order was coming.
The chaotic approach dates back to Trump’s days as a business executive, said Douglas Holtz-Eakin, president of the American Action Forum, a nonprofit, conservative organization.
“It’s only effective in the moment, and it wears off in the long term,” said the former director of the Congressional Budget Office and former economic policy adviser to John McCain’s presidential campaign. “It’s hard for the business community to figure out the direction of our policies.”
White House spokesman Judd Deere said in a statement that the administration “is committed to protecting the American people from all cyber related threats to critical infrastructure, public health and safety, and our economic and national security.”
Treasury Department spokeswoman Monica Crowley said in a statement that the department does not comment on the specifics of meetings with the president, although she confirmed that the secretary did participate in a meeting with the president to update him on national security recommendations.
“One of the great strengths of the Trump administration is the president’s reliance on strong, often opposing views, to reach decisions which are invariably in the best interests of the American people,” Navarro said in a statement. “Because this is true, it is critical for a strong America that ‘what happens in the Oval Office, should stay in the Oval Office’ so I have no comment on what is clearly a malicious leak riddled with hyperbole and misinformation.”
A tech finance giant shudders
TikTok is considered one of the biggest technological success stories to come out of China. People around the world use the app to make short videos about their lives, pets and dance moves. Parent company ByteDance CEO Zhang Yiming calls it a “window” into the world.
TikTok has 100 million U.S. users, many of whom are under 25 years old. Its success has drawn interest from prominent investors, including Sequoia Capital, a leading Silicon Valley venture capital firm. In 2014, its China arm made a prescient $35 million investment in TikTok’s parent company, giving it a stake that today is reportedly valued at more than $800 million. TikTok’s owner also acquired Musical.ly in 2017 for $1 billion, making it even more attractive to young users.
But with that success came scrutiny. TikTok was first identified as a potential national security threat in summer 2019, when U.S. officials approached ByteDance about concerns regarding its acquisition.
That turned into a formal national security investigation this year. It was led by the Committee on Foreign Investment in the United States (CFIUS), an interagency body that screens foreign investment transactions for national security risks and recommends to the president on security grounds whether certain proposed acquisitions should be rejected or completed acquisitions reversed.
In TikTok’s case, the app has been downloaded more than 175 million times in the United States and, like other apps, accesses copious amounts of sensitive personal data, including Internet and browsing activity, location data and search histories. That information is potentially available to the Chinese government under a national intelligence law that requires any Chinese company to “support, assist and cooperate with state intelligence work.”
The news of the investigation sent shudders through the halls of Sequoia Capital. Global managing partner Doug Leone took the lead on advocating for TikTok with the Trump administration, telling people he could use his influence with Trump to help the company, according to a person familiar with the discussions who spoke on the condition of anonymity to describe a private conversation. Leone and his wife have given $100,000 to Trump’s reelection bid, and Leone sits on the president’s task force for reopening the economy, according to public records.
Leone also cultivated his relationship with Mnuchin and the president’s senior adviser and son-in-law Jared Kushner, the person said. Sequoia is a co-investor in a health-care company with Kushner’s brother Josh.
Sequoia spokesperson Natalie Miyake said in a statement it remains supportive of TikTok and the service it provides for millions of people, and looks forward to the company reaching “a win-win solution for all parties” involved that is acceptable to the U.S. government.
Meanwhile, TikTok hired roughly a dozen lobbyists this year, one of whom ran Trump’s campaign in Pennsylvania and has been described by the president as a good friend, according to a person familiar with the company who spoke on the condition of anonymity to discuss company matters. The lobbyist was a U.S. Military Academy classmate of Secretary of State Mike Pompeo, who is also seen as a China hawk.
Publicly, TikTok started a campaign to convince the U.S. government that it was not a threat. The company has said that its app is mostly used for entertainment and that the app’s software code does not contain a back door that could be used for government surveillance. It began issuing transparency reports showing law enforcement requests for data and published the company’s source code. In May, Zhang hired Disney streaming chief Kevin Mayer as TikTok’s new CEO.
Zhang also began trying to decouple the company’s technology from China, and has pointed out that all the data on U.S. TikTok users is stored in the United States and backed up in Singapore. He has worked to separate TikTok’s software code and algorithms from the larger ByteDance conglomerate, which owns several apps in China.
Throughout this year, Zhang and his investors were confident that the concerns of the U.S. federal government could be resolved without ByteDance having to spin off TikTok. But things changed quickly after India outright banned the app at the end of June. At that point, the company and investors started hearing a different message from the White House, and it seemed increasingly possible that the anti-China members of the administration would prevail in breaking up the company.
Throughout July, investors and TikTok’s lobbyists, working privately with the administration, scrambled to come up with other plans, and numerous ideas were floated in what one person familiar with the discussions called an “iterative process.”
One plan involved bringing in a third-party U.S. company with knowledge of technology as a contractor to assure the security of TikTok. In another plan, investors proposed spinning off TikTok from ByteDance, with the investors buying a large share of the new independent company but allowing Zhang to maintain control through a minority stake. That plan involved bringing in another technology company as an investor to ensure security, the people said.
Zhang at one point considered relocating ByteDance’s headquarters to London, and moving there personally, to showcase ByteDance as a global company that was not controlled by Beijing, according to another person.
But this summer, as it became increasingly possible that administration hard-liners could prevail in breaking up the company, Zhang grew disappointed with how the process was playing out and approached Microsoft about a sale, according to the people. Zhang had previously worked at Microsoft’s offices in China in 2008 for six months, and maintained an admiration for the company. Earlier this year, he hired 24-year Microsoft veteran Erich Andersen to be ByteDance’s general counsel.
Other tech giants that have the financial wherewithal to buy the company have regulatory challenges that could make an acquisition more complex. The chief executives of Google, Amazon, Facebook and Apple all appeared last week before a House subcommittee investigating tech giants’ abuse of their power.
That gives Microsoft significant leverage. TikTok could help the 45-year-old software giant expand into social media, as well as bolster its ambitions to develop artificial intelligence systems, but the company has thrived financially in recent years on the strength of its business selling cloud computing services. That strengthens its hand as it negotiates to acquire TikTok.
Feeling increasingly boxed in, Zhang offered to sell to Microsoft.
A ‘vicious’ Oval Office fight
As the election approaches, Trump has increasingly lashed out at China, blaming it for the novel coronavirus and national security issues. Over the past few months, he has deployed a rarely used order to require the divestment of acquisitions by Chinese firms, as well as issuing executive orders to limit business dealings.
“I think Trump’s instincts are to be aggressive toward China,” said one former U.S. official. “Navarro’s like the devil on his shoulder, saying, ‘Do it, do it.’ Mnuchin is more like a governor, trying to slow everything down — ‘What about Wall Street? What about Phase 2 [of the trade deal]?’”
During the Oval Office meeting, the debate turned into a “vicious” fight, with Trump looking on, one of the people said. They noted that the two advisers have a contentious history: They got into an expletive-filled shouting match during a May 2018 trip to Beijing.
As of last week, the CFIUS agencies were unanimous that TikTok needed an American partner, according to a person familiar with the matter who spoke on the condition of anonymity to discuss internal negotiations. TikTok lawyers were working with the administration team on an orderly transition, according to the person. “The expectation at Microsoft and at TikTok was the president was going to sign off on what CFIUS said, and off we go,” the person said. “Instead, it’s just been this roller coaster.”
As Trump went to board the helicopter before flying to Tampa just over a week ago on July 31, he sounded unsure of his plans. “We may be banning TikTok,” Trump told reporters before leaving for Florida. “We may be doing some other things. There are a couple of options. But a lot of things are happening, so we’ll see what happens. But we are looking at a lot of alternatives with respect to TikTok.”
Later that evening, as he flew back aboard Air Force One to Washington, he told reporters he had made a decision to ban it, and that he was not in favor of a deal. By Sunday, Microsoft announced it had persuaded the president and would continue talks with a deadline of Sept. 15.
“Microsoft fully appreciates the importance of addressing the President’s concerns,” the company wrote in a blog post.
On Monday, Trump reiterated while speaking to reporters at the White House that he wants TikTok to be forced to cease operations in the United States by around Sept. 15 if it is not sold to Microsoft or another U.S.-based company. If that sale goes through, the president said, part of the proceeds should be paid to U.S. taxpayers as compensation for operating in America.
“A very substantial portion of that price is going to have to come into the treasury of the United States,” Trump said of the potential TikTok sale. “The United States should be reimbursed or paid because without the United States they don’t have anything.”
Tax experts say there is no legal way to take “a substantial portion” for the treasury. But the vague threat allowed him to appear to be imposing a punitive measure on China and TikTok — which some of his aides have pushed for fervently — without taking action so dramatic that it would cause a dangerous escalation.
Lawyers familiar with CFIUS reviews said the treasury does typically collect money during the process, because companies are required to pay modest fees to cover the cost of the review. The fees are based on the size of the proposed transaction and cannot exceed $300,000.
After Trump changed his mind to support a sale to Microsoft, Navarro on Monday accused the tech giant in a CNN interview of being too close to China, citing its prior cooperation with the government and the use of Bing and Skype in the country. He suggested Microsoft could divest its Chinese holdings.
“The question is, is Microsoft going to be compromised?” he asked.
With the clock ticking, analysts expect the purchase price to run into the tens of billions of dollars, a price tag only a handful of companies can afford. Microsoft had $136.5 billion in cash and easy-to-access funds at the end of June.
But those involved in a potential deal were thrown off balance again late Thursday, left in the dark about the president’s plans.
While flying on Air Force One, Trump issued two executive orders effectively banning U.S. transactions for TikTok parent ByteDance, citing national security concerns. An acquisition by Microsoft of TikTok during that period would still be allowed.
TikTok said in a statement it posted online Friday that it may take legal action to challenge the order.
“We are shocked by the recent Executive Order, which was issued without any due process,” the company said. “For nearly a year, we have sought to engage with the U.S. government in good faith to provide a constructive solution to the concerns that have been expressed. What we encountered instead was that the administration paid no attention to facts, dictated terms of an agreement without going through standard legal processes, and tried to insert itself into negotiations between private businesses.”