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Microsoft : CEO Remains on Hunt After TikTok Setback

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09/16/2020 | 02:48am EDT

By Aaron Tilley

Microsoft Corp. Chief Executive Satya Nadella suffered a rare defeat in his company's failed pursuit of viral video app TikTok. That doesn't mean he's done hunting for the tech giant's next big thing.

While the pursuit of a social-media app with little connection to Microsoft's core business surprised many observers, those who follow the company closely say it reflects Mr. Nadella's desire to find new segments of technology to help it sustain the business momentum and soaring stock price under his tenure.

"Microsoft needs to take a look at every big opportunity in tech," said Stifel Nicolaus analyst Brad Reback. "To sustain double-digit growth of this size in the long term, they will absolutely need to tap new markets."

Even before the prospect of buying TikTok emerged, Mr. Nadella had been hunting for a future growth driver to follow his massively successful bet on cloud computing, according to a person close to him. Mr. Nadella's next target may very well not be a social-media company, but in other ways would reflect his driving idea of finding new customers and users to attract into Microsoft's orbit.

Snagging TikTok's U.S. operations, which face a threatened ban by the Trump administration over national-security concerns, would have represented the latest in a string of big deals Mr. Nadella has undertaken to expand Microsoft's user base. It would also have expanded Microsoft beyond from the corporate customer focus he has emphasized, adding some 100 million mostly youthful users and potentially augmenting consumer-facing products such as the Xbox gaming platform.

Mr. Nadella's prior big acquisitions, the professional networking site LinkedIn, the coding-collaboration platform GitHub Inc., and videogame developer Mojang AB, owner of "Minecraft," added millions of users.

But ByteDance Ltd., TikTok's Chinese parent, jilted Microsoft on Sunday after weeks of tumultuous talks between the companies, the White House and Chinese government -- opting instead to join with Microsoft rival Oracle Corp.

The talks with ByteDance showed Mr. Nadella's interest in a bold move even when it comes with risks. The TikTok negotiations put Microsoft very publicly at the center of the unfolding tussle over technology leadership between the U.S. and Chinese governments.

The low-key CEO personally lobbied President Trump for the deal in a phone call in early August, and the company said it was committed to satisfying the administration's national-security concerns as part of any deal. Microsoft's involvement also risked the ire of China's government, which has bristled at U.S. pressure on TikTok to sell.

In a terse statement after losing, Microsoft defended its careful handling of security, privacy, safety and other considerations, and said: "We look forward to seeing how the service evolves in these important areas."

Some Microsoft investors say missing out on TikTok has upsides. "I'm actually relieved that they didn't win it," said Kevin Walkush, a portfolio manager at Jensen Investment Management, which owns nearly four million shares in Microsoft. "I think it would have added complexity to the business," he said, adding there was no clear path for the company to make money to recoup what was expected to be a multibillion-dollar investment.

But it leaves the question of what comes next.

Mr. Nadella concentrated Microsoft largely on courting enterprise customers after he took the top job in 2014 following a period in which the company repeatedly stumbled in the consumer market. That emphasis revived the software giant's fortunes and has lifted its shares. Microsoft's stock is up fivefold since Mr. Nadella ascended to the CEO role. Shares are up more than 30% this year.

The cloud business's potential remains bright, but growth has begun to slow, in part reflecting the reality that the business has gotten huge -- it represented more than one-third of Microsoft's $143 billion in total revenue in the year through June 30. Sales growth for Azure, Microsoft's principal cloud product, fell below 50% in the most recent quarter.

"Anything that could drive a long-term growth story or positive disruption story is on the table," said Mark Moerdler, a senior research analyst at Bernstein Research.

Microsoft has ample cash to pursue other growth prospects and Mr. Nadella has before shown he is willing to splash out to fuel growth. Shortly after Mr. Nadella became CEO, he paid $2.5 billion to buy the maker of "Minecraft." Two years later he followed with Microsoft's biggest deal ever, the roughly $26 billion purchase of LinkedIn, and then spent $7.5 billion for GitHub. The company, midyear, sat on $137 billion in cash.

Where Mr. Nadella may choose to strike is uncertain. "I've been saying for a while that when Microsoft makes its next big acquisition, I'm going to scratch my head over it for a while," Bernstein's Mr. Moerdler said, adding TikTok was just such an example.

Investors don't see any urgency for Mr. Nadella to act. Mr. Walkush still sees healthy earnings and plenty of cloud-growth potential. "They're not in a position where they have to make an acquisition," he said.

Write to Aaron Tilley at aaron.tilley@wsj.com


Stocks mentioned in the article
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MICROSOFT CORPORATION 2.28% 207.82 Delayed Quote.28.85%
ORACLE CORPORATION 0.84% 59.8 Delayed Quote.12.87%
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