Mnuchin expects security review of Oracle-TikTok deal this week

Oracle Corp.’s closely watched bid for TikTok’s U.S. operations will not only have to pass a U.S. national security review, it’s also going to need to win the blessing of President Donald Trump.

The U.S. government will undertake a two-track national security review of Oracle’s TikTok proposal this week, Treasury Secretary Steven Mnuchin said Monday.

The deal, if finalized, would create what Mnuchin called “TikTok Global.” He added that the unit would have its headquarters in the U.S. and create 20,000 jobs -- potentially a move to sweeten the deal as Trump faces what promises to be a hotly contested presidential election in November.

Instead of buying the business outright, Oracle would make an investment in a newly restructured TikTok, people familiar with the proposal said. At least two shareholders in TikTok’s Chinese parent company, General Atlantic and Sequoia Capital, would take stakes in the new business, said one of the people, all of whom asked not to be identified because the terms aren’t finalized. The details could be worked out in the next 48 hours, the person said.

The sale of TikTok -- forced by a Trump administration ban on national security grounds due to TikTok’s Chinese ownership -- is one of the issues at the heart of the fraying Washington-Beijing relationship. Any deal still requires signoffs from both the U.S. and China.

TikTok confirmed it submitted Oracle’s proposal to Treasury, saying it “would resolve the administration’s security concerns,” according to a spokesperson. Mnuchin said the deadline for a deal, according to Trump’s executive order, is Sept. 20.

Trump has also insisted that any sale of the TikTok video app include a cut for the federal government. That demand -- which is more akin to a high-stakes real estate deal than a government-ordered divestiture -- has baffled policy experts and lawyers who say such a payment would stretch his authority under U.S. law.

A Treasury spokeswoman declined to comment on whether a deal with Oracle will include the fee that Trump has talked about.

Oracle confirmed in a statement Monday it’s part of the proposal submitted by TikTok’s owner ByteDance Ltd. to the Treasury Department over the weekend in which Oracle will serve as the “trusted technology provider.”

Oracle edged out rival Microsoft Corp., which had been working with Walmart Inc., and had been seen as the frontrunner, but those talks had cooled in recent days. Oracle rose 4.3 per cent to US$59.46 in New York.

“We need to make sure that the code is, one, secure, Americans’ data is secure, phones are secure, and we’ll be looking to have discussions with Oracle over the next few days with our technical team,” Mnuchin told CNBC during an interview early Monday.

Oracle has nurtured a relationship with Trump since before his administration began. Oracle’s co-founder and chairman, Larry Ellison, is one of the few Silicon Valley moguls to openly support Trump, who has called him a “great guy,” and voiced support for Oracle’s TikTok bid. Ellison let Trump use one of his California estates to hold a fundraiser in February.

Chief Executive Officer Safra Catz has contributed to Trump’s re-election campaign, served on the president’s transition team and has dined with him at the White House.

The Committee on Foreign Investment in the U.S., or Cfius, will meet this week before it makes its recommendation to Trump, who will make the final decision. The deal must also go through a separate national security review, he said, in order to comply with Trump’s executive orders last month. That process will be overseen by the Commerce Department.

A deal between ByteDance and Oracle will look more like a corporate restructuring than the outright sale Microsoft had proposed, though it is likely to include a stake in a newly configured American business, Bloomberg News reported.

The terms being discussed with Oracle are still evolving, according to a person familiar with the talks. One of the options being explored is that Oracle could take a stake in a newly formed U.S. business while serving as TikTok’s U.S. technology partner and housing the video app’s data in Oracle’s cloud servers. Early offers from both parties valued the U.S. business at about US$25 billion, but that was before Chinese officials weighed in with new rules imposing limits on technology exports, said people with knowledge of the matter. Softbank Group Corp. and Walmart have also expressed interest in joining any bid.

While Mnuchin led the effort on behalf of the Trump administration to find ways to sell TikTok rather than ban it, the deal may still not be approved by Cfius. The panel, led by the Treasury secretary, includes nearly 10 agencies including State, Defense and Homeland Security. Representatives from the national security and intelligence community may reject the deal because it doesn’t comply with Trump’s original order: A full sale.

Even if TikTok’s data is stored by Oracle in the U.S., that could mean that ByteDance would still keep at least some control over the app’s algorithms, the computer code behind what the service uses to pick and choose which videos are shown to which users, which ByteDance has perfected over many years. If TikTok’s algorithms remain in the hands of ByteDance, they could run the risk of being manipulated by Beijing to run information campaigns or deliberately show video to American users that could influence, say, the U.S. elections. The administration cited the possibility of disinformation campaigns on behalf of the Chinese Communist Party when Trump issued an order banning the app last month.

Analysts say another possibility is that Oracle builds a brand new algorithm for TikTok’s U.S. operations to run on, controlled by Oracle or TikTok engineers that are based in the U.S. That way, the idea is that Oracle would “own” the algorithms, which would be out of China’s reach.

If the Chinese company is able to get a deal through the White House that doesn’t involve an outright, forced sale, it would be a major feat for ByteDance founder Zhang Yiming, who has been reluctant to hand over such a prized asset. Yet critics were still questioning how a technology partnership with Oracle, rather than an outright sale, would assuage the White House’s national security concerns.

“A deal where Oracle takes over hosting without source code and significant operational changes would not address any of the legitimate concerns about TikTok, and the White House accepting such a deal would demonstrate that this exercise was pure grift,” Alex Stamos, former chief security officer at Facebook, said in a post on Twitter.

Early indications of the structure of the deal suggest it’s a far cry from Trump’s stated aim to push TikTok into the arms of an American company through an outright sale.

The outlines of the transaction hearken back to what ByteDance originally proposed to the administration: Create a new U.S.-based entity with a global headquarters in New York, as well as a reconstituted board of directors that would provide some distance from Beijing. Oracle would also have to host all the U.S. user data in country, something that TikTok already does using Amazon Web Services and Alphabet Inc.’s Google Cloud.

Oracle would have to go further than that and re-engineer the algorithms to please the U.S. government, analysts say. “The algos need to be ‘owned’ by Oracle in order to satisfy U.S.-government requirements that Chinese government interests could not censor content or influence users on the TikTok platform,” wrote Macquarie Research analyst Sarah Hindlian-Bowler.

Mnuchin appeared optimistic. “We have a lot of confidence in Oracle,” he told reporters at the White House later Monday.