Microsoft Should Score a Bargain on TikTok – History Says It Won’t

Despite Microsoft’s unimpressive history at acquisitions, the conditions are ripe to scoop up TikTok's U.S. business at a serious discount. | Source: Olivier DOULIERY / AFP

• Microsoft and ByteDance have until next month to reach a deal over TikTok.
• TikTok is reportedly valued at around $50 billion.
• The U.S. tech giant is notorious for overpaying for acquisitions. Will it finally get a bargain?

TikTok presents a golden opportunity for Microsoft (NASDAQ: MSFT) to expand its fledgling digital advertising business in ways the $1.6 trillion software giant could only dream of before.

The short-form video app is growing unbelievably fast. TikTok has 800 million users worldwide, including 100 million in the United States. And it’s dominated by the demographic advertisers crave most. Slightly over 45% of TikTok’s users are between 20 and 39 years old.

With the Trump administration putting ByteDance on the hot seat, Microsoft should be poised to scoop up the app for a bargain. On the other hand, the Satya Nadella-led firm has a history of overpaying for acquisitions.

Microsoft is notorious for overpaying on acquisitions

Take LinkedIn. Microsoft forked out $26.2 billion in cash – a 50% premium over the stock’s value – for the professional social network in 2016. Unsurprisingly, analysts said Nadella overpaid.

It was Microsoft’s largest deal ever, but it wasn’t the first time the company threw cash around for the sake of flaunting its wealth.

In 2013, Microsoft spent $7.2 billion to gobble up mobile phone maker Nokia. Two years later, the enterprise software giant took a $7.6 billion write-down on the acquisition.

Video: Nokia is a perfect example of Microsoft splurging on an acquisition – only to execute a massive write-down later.

And just one year before purchasing Nokia, Microsoft took a $6.2 billion write-down on advertising firm aQuantive. That was after spending $6.3 billion to buy the company in 2007.

Has Microsoft learned its lesson? Or do old habits die hard at the company’s Redmond campus?

TikTok could be a value to Microsoft at any price

Before Microsoft emerged as a serious suitor for TikTok, investors valued it at $50 billion – 50 times its projected revenues for 2020.

And some analysts allege it’s a bargain at any price. Wedbush estimates that TikTok could be worth $200 billion to Microsoft by 2023.

Video: Microsoft’s most “memeable” alumnus Steve Ballmer is excited about a potential TikTok acquisition

Microsoft is likely only buying the TikTok service in the U.S., Canada, Australia, and New Zealand, though. According to CNBC, the actual purchase price could land between $10 billion and $30 billion.

That means TikTok could be Microsoft’s largest acquisition since LinkedIn – and possibly even larger.

Microsoft has an opportunity to scoop up TikTok at a bargain

Despite Microsoft’s unimpressive history at acquisitions, the conditions are ripe to scoop up TikTok’s U.S. business at a serious discount. ByteDance is a desperate seller, and the clock is ticking.

Will Microsoft, finally sensing its opportunity to join the digital advertising race in a big way, act desperate once again and overpay?

Or has it finally learned the importance of driving a hard bargain?

If the latter, it will all be thanks to President Donald Trump. The White House has threatened to ban the app in the U.S. if it doesn’t get a buyer by mid-September.

Under these conditions, ByteDance knows it has to sell – or walk away empty-handed.

Over to you, Microsoft.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.