So, honestly: Does buying LinkedIn make sense (or cents) for Microsoft?
By Edwin Yapp June 24, 2016
- Critics sceptical of Microsoft biggest-ever deal because of its poor track record
- Key is to integrate LinkedIn’s social data with its customer-related products
ABOUT a fortnight has passed since the news broke that Microsoft Corp is shelving out a whopping US$26.2 billion – the biggest deal in its history – to acquire social media networking company LinkedIn Corp.
Despite all the headlines the news has generated so far, nobody is really in agreement as to whether the deal is good for both companies, and if there is any real synergy in the acquisition.
And that’s putting it mildly.
To recap: On June 13, Microsoft announced that it would be paying US$26.2 billion or US$196 per share in an all-cash deal to acquire LinkedIn.
The Redmond, Washington-based software giant will finance the deal primarily with new debt, although it has cash and cash equivalents of about US$100 billion parked offshore. Bringing home any of it to fund the proposed purchase isn’t an option as it would generate a huge tax bill, according to Bloomberg.
The deal – reportedly sanctioned by LinkedIn chairman and controlling shareholder Reid Hoffman – is expected to close by the end of the calendar year, pending shareholder and regulatory approvals.
LinkedIn will retain its brand, culture and independence. Jeff Weiner will remain chief executive officer (CEO) of the social networking company and will report to Microsoft CEO Satya Nadella, the companies said in a joint statement.
“LinkedIn and Microsoft really share a mission of helping people work more efficiently,” Nadella said in a conference call with analysts, Reuters reported. “There is no better way to realise that mission than to connect the world's professionals.”
Despite the PR spin by the two CEOs after the announcement, analysts and pundits were still wondering if the deal made sense. An anecdotal poll of those who commented yielded about a 50-50 split of those who thought the deal made sense and those who didn’t think so.
In a nutshell, the arguments from both sides of the aisle centred on three issues:
- Whether the deal is overpriced;
- The hazy outlook of how the two companies will integrate their strategy and products; and
- Whether or not Microsoft can successfully pull off such a deal, given its dismal track record of mergers and acquisitions (M&As).
News of the deal sent LinkedIn’s shares soaring 47% to US$192 from US$131, but the same can’t be said of Microsoft’s shares, which closed 2.7% down at US$50.14 from US$51.48 on June 13.
Considering that LinkedIn’s shares peaked at US$269 in February 2015 but reached its nadir of US$101 in February 2016, the offer is a great one – nearly a 50% premium over its share price – for the Mountain View, California-based company.
According to data compiled by Bloomberg, the US$26.2-billion offer values LinkedIn at about 91 times earnings before interest, taxes, depreciation and amortisation (EBITDA). Excluding net cash, the multiple is about 84 times EBITDA.
That’s the highest of any takeover valued at more than US$5 billion this year, the business daily added.
Adam Levy, an analyst with The Motley Fool, was critical of the deal, arguing that Microsoft is paying a hefty premium for LinkedIn, given that it only paid 46.7 times EBITDA for Skype and 40.7 times EBITDA for aQuantive (an adtech company it purchased for US$5.5 billion in 2007).
In terms of subscriber acquisition costs, Levy said Microsoft is paying US$250 per average monthly visitor and US$60 for each of LinkedIn's 433 million registered users, which he said was way too high.
“Even Facebook didn’t pay that much for WhatsApp, when it bought the messaging app for US$19 billion,” he argued.
“It paid just US$42 for each of its 450 million active users [but] it has since grown WhatsApp to over one billion users – a milestone LinkedIn is unlikely to reach, at least not anytime soon.”
Levy also pointed out that paying premium for LinkedIn would not be a bad thing if it was profitable.
LinkedIn lost US$166 million on the back of US$3 billion in revenue last year, a loss that had widened from US$16 million the previous year. Additionally, LinkedIn’s revenue growth in 2016 is expected to dip by more than 10 percentage points to 24.5%, and to just 19.6% in 2017, he added.
“Nadella said a key part of the acquisition is ‘accelerating LinkedIn's growth’ in a memo. If anything, that’s an understatement,” Levy declared.
While there are other analysts who thought the deal was worthwhile, both Fortune and Barron’s argued otherwise too, while the Financial Times postulated that there were other motivations behind the deal.
Is there synergy?
On whether there was any synergy to the deal, again there were opposing views that just about cancelled each other out.
During the announcement, both Nadella and Weiner touted the broad benefits of the acquisition by playing up how the two companies could potentially work together.
One such example is the use of Microsoft’s Cortana digital assistant to access information pulled from LinkedIn about participants in an upcoming meeting, while a LinkedIn newsfeed could serve up articles based on projects that users are working on.
Another example they quoted was how new products could include a sort of consulting service that could suggest an ‘expert,’ who might be able to help with a given project.
Ben Thompson, independent analyst and founder of Stratechery, argued that the deal, if done correctly, would provide Microsoft with a way into an area it never had good presence in before: That of treating enterprise customers as consumers.
He pointed to the potentially transformative element of the deal where Microsoft retains its “focus on [the] enterprise while shifting the locus of its business from companies to employees.”
“The ‘consumerisation of IT’ is not only about creating a compelling user experience in IT products, but also about treating enterprise users as consumers,” he argued.
“With LinkedIn, Microsoft can form a direct relationship with its end-users that goes far beyond the chief information officer (CIO), and opens up a huge array of opportunities that not only were unavailable previously but are also critical in a world where CIOs matter less than they ever have previously.”
Technology Business Research vice president Stuart Williams made a similar argument, arguing that the acquisition begins to narrow the wide functional gap Microsoft has between its Office365 productivity suite and its business-process-focused Microsoft Dynamics portfolio.
Saying that Microsoft struggles to connect the daily work of employees with the broader functions of the enterprise, Williams believes that LinkedIn’s social data and content offer a way to knit these two functions together.
“Personal work can be informed by profile information, recent publications and peer reviews of collaborators,” Williams said.
“Businesses, especially sales and recruiting, can be informed by searches across and through the social graph. Account-based marketing can largely be informed by the collective data shared within LinkedIn’s personal and business profile information,” he suggested.
Williams said a key element to the potential value is linking the two ‘graphs’ of enterprise workflow information and professional relationships by connection of LinkedIn data and content with Dynamics, Office365, Cortana and Bing.
However, he warned that one big factor that might stymie all these possibilities is a lack of continual engagement by LinkedIn members.
“Only 105 million members out of 433 million are active on a recurring monthly basis. Improving this ratio of engagement is one key to driving more opportunity and revenue.
“If customer experience drives revenue, increasing engagement is key,” he said.
Forrester Research principal analyst Dan Bieler offered another viewpoint in a research note, saying that LinkedIn’s status of trusted independent platform for professional information exchange could be undermined.
“Although the deal helps Microsoft strengthen its social networking services and professional content, there will be LinkedIn users who are not keen to be sucked into the Microsoft ecosystem as part of their social collaboration activities,” he said.
Can Nadella pull it off?
That brings us to the last point: Microsoft’s dismal track record of integrating companies it has acquired.
Critics have pointed to a number of high-profile deals that went terribly wrong for Microsoft. At the top of the list was its US$9.4-billion takeover of Nokia. The deal’s architect was Nadella’s predecessor and long-time Microsoft CEO Steve Ballmer, and it went south horribly.
Microsoft eventually had to largely write down as much of the US$7.6 billion of the buying price, while its product integration strategy with Windows Phone went nowhere. It ended up with massive layoffs at Microsoft.
There are others. In 2012, Microsoft bought workplace chat service Yammer Inc for US$1.2 billion, but rivals such as Slack have become more accepted as an enterprise chat tool. Ditto for its aQuantive acquisition, which it wrote down by US$6.2 billion in 2012.
With Skype, Microsoft took too long to bring it into its fold that customers moved away from it and began using rival products as their workplace collaboration tool of choice.
“Sadly, history has shown [that synergies] are very difficult to realise when two big companies combine, especially to the extent LinkedIn is remaining an independent fiefdom within the Microsoft empire,” Mitch Kapor, founder of Lotus Development Corp and partner of venture firm Kapor Capital, told The Wall Street Journal (registration required).
Still, there are others who believe that this is a very different era from the time when Microsoft made those acquisition mistakes.
Some have argued that the nature of Microsoft’s takeover of Nokia isn’t the same as the LinkedIn deal. Others have pointed to the fact that Nadella is a different kettle of fish from Ballmer, in that he understands what it takes to make this new wave of M&As work, and that he has the savvy to bring it to fruition.
Forrester’s Bieler argued that in order for Microsoft to succeed, it must be much faster to decide on its LinkedIn strategy than it did with Skype (where it took five years).
He also pointed out that Microsoft must redouble its mobile efforts as large parts of LinkedIn’s activities are now mobile-based.
“Microsoft's weak position in mobile ecosystems could dramatically undermine LinkedIn’s longer-term opportunities. If Microsoft underestimates the mobile dimension for LinkedIn, the future for LinkedIn could be very questionable.
“Users are fickle and there is no loyalty to outdated social media platform,” said Bieler.
Meanwhile, TBR’s Williams said, “Maintaining the trust and participation of LinkedIn members is the greatest risk and potential reward for Microsoft in this acquisition.
“All uses of the data must, in the end, be useful to the members who volunteer and maintain their profiles and engagement.
“So long as Microsoft abides by the spirit of LinkedIn as a personal professional social network, it can use that data to add value to other offers,” he added.
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