Meta Platforms is preparing to have to unwind its acquisition of the artificial-intelligence startup Manus after China banned the transaction on national-security grounds Monday, according to people familiar with the matter.
Meta bought Manus, a China-linked, Singapore-based startup that specializes in building AI agents, in December for $2.5 billion, and quickly moved to integrate the new technology into its systems. Any attempt to undo the acquisition would mean disentangling the two.
In another complication, Manus’s investors, which include California-based venture-capital firm Benchmark, have already received their returns, people with knowledge of the matter said.
Meta garners significant revenues from Chinese advertisers who target consumers outside China, despite Facebook and other Meta apps being blocked in the country.
Several former Manus investors in Asia, including Tencent, HSG and ZhenFund, have planned to cooperate if Meta goes ahead to unwind the deal, some of the people said.
Beijing has handed the two companies a preliminary deadline of several weeks to unwind the deal and fully restore Manus’s Chinese assets to their original state, some of the people said. This includes stripping any previously transferred data or technology from Meta. Beijing has also considered imposing penalties on Manus and Meta if the deal couldn’t be fully rescinded, these people said.
Benchmark didn’t immediately respond to a request for comment.
The deal angered Beijing, which started reviewing the deal shortly after it was announced, and in March called in the two co-founders—Xiao Hong and Ji Yichao—to discuss the acquisition. The executives were later told not to leave the country pending the investigation.
Neither Xiao nor Ji immediately responded to requests for comment. China’s National Development and Reform Commission—the authority that ordered the unwinding of the Manus acquisition—didn’t immediately respond to a request for comment.
Engineers at Beijing Butterfly Effect Technology, which Xiao founded in 2022, created early versions of Manus. Subsequently, a Singapore-based entity, also called Butterfly Effect, took over operation of the AI agent tool in markets outside China. Last summer, Manus moved most of its China-based employees to Singapore after receiving investment from Benchmark.
Chinese authorities believe they have the authority to demand the deal be unwound because Beijing Butterfly Effect Technology remains a Chinese company, The Wall Street Journal previously reported. Chinese law dictates that any foreign investments that may carry a national-security risk could be subject to review by authorities.
Before the announcement of the ban, discussions were held about a potential deal to resolve Beijing’s concerns, with the departure of Manus’s founders from Meta discussed as one concession. Meta, which in some instances has hired startups’ leadership teams without buying the companies, has acknowledged it will have to let the Manus founders depart as part of unwinding the acquisition, according to people familiar with the matter.
The ban sends a message to other prospective Chinese founders who are considering taking their technology outside the company at a time when tensions in the sector are heightened between the U.S. and China. Both countries have tightened export controls and curbed cross-border investment.
Investors with stakes in Chinese AI companies said Beijing’s Monday order serves as a warning to any startup seeking to emulate Manus. However, they warned that the mounting risks may also drive away foreign investors interested in China’s emerging technologies. China’s most successful tech companies, including ByteDance and Alibaba, have tapped foreign capital in their early days.
Write to Raffaele Huang at raffaele.huang@wsj.com and Meghan Bobrowsky at meghan.bobrowsky@wsj.com