Oracle’s TikTok Bid Leaves Open Some U.S. Security Concerns

(Bloomberg) -- Oracle Corp.’s bid for TikTok falls short of resolving concerns of Trump administration officials that the Chinese-owned video-sharing app poses a risk to U.S. national security, according to people familiar with the matter.

President Donald Trump has the authority to sign off on a deal, but continuing concerns from national security officials might sway his decision. The agreement remains on the table, with discussions continuing between administration officials and the companies, said the people, who asked not to be named because the talks are confidential.

Addressing those remaining issues could clear the way for U.S. approval, the people said. The companies are still working to make their case with the government, according to the people, and think they can still prevail.

At a press conference on Wednesday evening, Trump said he was not happy about what he was hearing about the bid, but added that he would be briefed on the details Thursday morning. “I’m not prepared to sign off on anything,” he said.

He now has four days until a self-imposed Sept. 20 deadline to decide whether to approve a proposal by TikTok’s Chinese parent ByteDance Ltd. to restructure the video app’s global operations as a new standalone company that would give Oracle and other American investors a minority stake.

The officials, including Secretary of State Michael Pompeo, are concerned that after a potential transaction, ByteDance Ltd. could still have have access to user data from its nearly 100 million users in America, said the people. The officials remain wary about the proposed new ownership structure and how much influence that would give China over the company.

Terms of the proposed deal would give Oracle full access to TikTok’s source code and updates to make sure there are no back doors used by the company’s Chinese parent to access data on the video-sharing app’s 100 million American users, according to people familiar with the matter describing provisions submitted to the U.S. government over the weekend.

The terms illuminate what the companies and security officials mean when they call Oracle a “trusted technology partner,” which goes beyond just housing data inside Oracle’s U.S. cloud servers, according to people with knowledge of the terms, who asked not to be identified because they weren’t authorized to speak publicly.

Oracle would be able to check all source code from the algorithms that decide which videos get shown to which users to ensure there are no back doors and will be able to continue to review the technology as updates come in to make sure there are no new points of access, the people said.

The newly formed TikTok would be headquartered in the U.S. and would hire an independent board approved by the U.S. government. The standalone company would also have oversight by a third party, which would report to the U.S. government and provide continuous audits, reports and protocols for handling any incidents that may arise, according to the people.

Treasury Secretary Steven Mnuchin has reviewed the proposed deal, according to some of the people. Attorney General William Barr was only briefed on the deal Wednesday and is reviewing it, according to a Justice Department official who declined further comment. Barr spoke with Oracle executives Wednesday morning, two people familiar with the situation said. Pompeo had a conversation the company officials last week.

TikTok has emerged as a top target in Trump’s effort to crack down on China ahead of the Nov. 3 election. The president is trailing his Democratic opponent Joe Biden in the polls and seeking to use his tough stance with Beijing as a selling point to voters.

The Treasury, State and Justice departments are all part of the Committee for Foreign Investments in the U.S., or Cfius, that reviews deals for national security implications. In a meeting Tuesday afternoon, officials raised concerns about a deal that would leave a majority stake of TikTok’s U.S. assets in ByteDance’s hands, with Oracle taking a minority share, the people said.

The panel was expected to meet again Wednesday to discuss the potential sale, according to one of the people.

White House press secretary Kayleigh McEnany said a decision on TikTok is coming in “short order” during a briefing with reporters.

“We care deeply about protecting the data and security of American citizens.”

Spokespeople for Treasury and State declined to comment. The Justice Department official didn’t immediately reply to a question about whether the attorney general had spoken to Oracle.

TikTok declined to comment.

While user data from Americans would be stored by Oracle in the U.S., it appears the rest of the technology underpinning the app, including ownership of the prized algorithms that pick and choose which videos to show users, and the engineering teams in China that work on them, would remain in the hands of TikTok’s Chinese owner.

Regardless of where the data is stored, critics of the deal say that national security concerns can’t be resolved as long as Tiktok’s Chinese parent wields financial control of the company.

The Oracle agreement is facing sharp pushback in Congress, where some lawmakers have argued that its terms don’t go nearly far enough to address the reason why Trump demanded the sale in the first place. A letter sent to Trump on Wednesday by Senator Marco Rubio of Florida and five other Republicans said the deal in its current reported form “leaves significant unresolved national security issues.”

In a separate letter to Mnuchin, Texas Senator Ted Cruz also said the deal fell far short. Like other opponents, Cruz called for an “outright sale” of Tiktok if necessary. Some have also demanded TikTok turn over the algorithm that helps determine the content seen by users.

Opposition like that from the senators is important because many of them have a direct line to Trump and will almost certainly lean on him to reject any deal they don’t like. Congressional rejection could also raise the prospect of reputational risks for Oracle because lawmakers could seek to shame the company for cutting a deal that they argue undercuts U.S. national security.

The proposal presented to Cfius stands in stark contrast to what was originally called for by President Trump in a pair of executive orders issued last month calling for a ban of the app unless it was sold to an American owner.

The new TikTok deal with Oracle doesn’t call for the software company to buy the business outright. Instead, Bytedance would maintain majority ownership and provides Oracle with a stake in the business and a role as a key technology partner.

At least three shareholders in TikTok’s Chinese parent company -- General Atlantic, Sequoia Capital and Coatue Management -- would take stakes in the new business, said the people, all of whom asked not to be identified because the terms aren’t finalized. Walmart Inc., which had previously partnered with Microsoft Corp. to make an outright bid for TikTok’s U.S. business, remains interested in investing as well, the company said earlier this week.

The Oracle proposal being considered by Cfius also lacks the payment to the U.S. government that the president had insisted be the condition of any deal, according to two people familiar with the plan. Yet TikTok will try to use the promise of creating 20,000 new jobs through the popular video app as a way to win his approval, they said.

The deal would also have to get the blessing from the Chinese government, which has outwardly scolded Trump for pushing a fire-sale of TikTok and publicly shown its support for Bytedance, recently giving the tech giant the green light to acquire a company with a coveted national digital payment license — a competitive arena that Beijing strictly controls.

©2020 Bloomberg L.P.