Will Microsoft successfully acquire TikTok?

Current price: US$212.48   Target Price: US$220   Recommendation: Buy

On 7 Aug, Twitter expressed interest in buying TikTok’s US operation. The increase in potential competitor reduces the investors’ confidence in the acquisition deal, causing a drop in stock price. It is far from certain that twitter would be able to outbid Microsoft to buy TikTok. Twitter has a market capitalization of close to $30 billion, almost as much as the valuation of TikTok’s assets to be divested. Hence, Twitter would need to raise additional capital to fund the deal. Twitter will have a hard time putting together enough financing to acquire even the US operation of Tik Tok.The potential competitor Twitter (TWTR) have a harder time paying for TikTok, due to the insufficient of fund.
Hence, Microsoft being a company with more market capital, and a company which confirmed on Aug. 2 that it was pursuing a deal for TikTok and that its CEO Satya Nadella had discussed a possible transaction with President Donald Trump. Microsoft is possibly be the winner.

Recommendation

After the announcement of interest of Twitter, the stock price has fallen back to US$212.48, the stock price is expected to fall even further due to the lack of investor confidence in acquiring TikTok with the increase in potential bidder. Hence, it is advised to buy in at roughly US$207.

As aforementioned, Microsoft having the rival for the deal. It is expected with the announcement of the success in acquisition of TikTok on or before 15 Sept would cause a surge in stock price to roughly US$258. There are 80 % to have successfully acquire TikTok, 20 % to be unsuccessful. Hence, the expected price US$233.

Using the conservative forward P/E multiple of 40 and Thomson Reuters 2021 consensus earning per share US$6.459, this gives us a price of HK$258, which indicates around 20% undervaluation of this stock.

We used 40 P/E multiples since 1. The stock price already reflected the result of announcement of potential acquisition of TikTok. With the current PE ratio of 36.57, it is expected that the success of acquisition will only cause a slight surge in PE ratio

If the price is fallen down to US$ 135 and the unsuccessful of acquisition of TikTok. The stock price is not possible to have risen to a high price again. Hence, if the price is fallen down to US$135, investor should not buy in.