Is LinkedIn doomed to be a Microsoft turkey?

  • Microsoft has a poor history of successful acquisitions
  • No clear strategy for increasing Linkedin's profitability
Is LinkedIn doomed to be a Microsoft turkey?

HERE we go again. Microsoft's announcement that it was buying corporate social network LinkedIn for just US $26.2 billion caught everyone by surprise.
See below the CEOs of the two companies discussing the buyout.

But a lot of people outside the two companies are left scratching their heads in puzzlement. Does the buyout make any financial sense?
Microsoft is paying a 49.5% premium to LinkedIn’s closing price at the time of the announcement. Like the Skype buyout, LinkedIn will retain its own brand as well as independence. Jeff Weiner will remain CEO of LinkedIn and he will report to Microsoft CEO Satya Nadella.
The Seattle giant has a very poor track record in successful acquisitions. Microsoft bought marketing outfit aQuantive for US $6 billion in 2007 which ultimately led to a US $6.2 billion write off in 2012. Massive Incorporated, the in-game advertising company was purchased by Microsoft in May 2006 for between US $200 million to $400 million. It was closed down in 2010.
Nokia was bought in 2014 for US $6.1 billion. This led to losses of about US $8.5 billion in 2015 and 2016. Another high profile buyout was Skype for US $8.5 billion in 2011. Although it is still going, it is hardly a money spinner. In the period after its acquisition, Skype subscriber numbers have flattened. It is now facing a stiff challenge from Whatsapp and Facebook Messenger.
Also, US $26.2 billion dollars is a lot to pay for a company that does not make a profit. As a corporate strategy, it does not make any sense. Does Microsoft want Linkedin because it is a social networking site? If so, then the company has tried this before and failed.
Microsoft had earlier bought Yammer for US $1.2 billion in 2012. At least in that case, the business logic was very clear. Yammer's software-as-a-service subscription model was ideal for Office 365. Yammer is now part of the Office package.
But like most Microsoft acquisitions, Yammer is also doomed to be a failure. The enterprise-focussed social networking app, Slack, is currently on the upswing. With the 'curse' of Microsoft hanging over it, the world is very likely to soon start asking Yammer who?

But Linkedin is not Slack or even Yammer. Although it is ostensibly enterprise-focussed, it is much more generic in its targeting. With its habit of sending out Emails from almost complete strangers, it is also not the most likeable social network. Its biggest fans are recruitment agents.
This is reflected in its revenues. LinkedIn's biggest chunk of revenue comes from Talent Solutions, which provides services to recruiters and companies trying to hire staff. This is followed by Marketing Solutions which sells advertising.

Is LinkedIn doomed to be a Microsoft turkey?
As with all such acquisitions, Microsoft provided analysts with a colourful presentation justifying it. In the slide about future plans, Microsoft is vague on what it plans to do with the Linkedin userbase. It talks about driving 'increased engagement across Linkedin as well as Office 365.'
Really? How does Microsoft plan to drive 'increased engagement' (whatever that means) in Office 365 by adding the Linkedin userbase? This is pure marketing spiel.
Is LinkedIn doomed to be a Microsoft turkey?
In the next slide, Microsoft says the total addressable market of the two companies is larger than either of them separately. This is not quite true either. Microsoft's Office suite already has over 1.2 billion users. It is a pretty good bet that most of these users are already on Linkedin. So it is hardly going to increase 'engagement' in Office 365.
Microsoft also says that the LinkedIn profile will be integrated in Outlook, Skype, and other applications. So is that a huge benefit to the users or more importantly, Microsoft? Is it really worth US $26.2 billion dollars?
Even before the buyout,  the Outlook Social Connector allowed data from Linkedin to be shown within Outlook. It mainly consists of status updates and a profile picture. Future integration is supposed to be much more extensive as Microsoft will have full access to Linkedin's APIs.
But of what use is that data for an Office user or Microsoft? To reiterate the previous question, is it really worth US $26.2 billion dollars and can Microsoft make a profit in the years ahead from the buyout?
Currently, Linkedin has only around 2 million paying subscribers. Microsoft has not given any projections on how much that number will increase or by when. Even if every single Office 365 subscriber gets a Linkedin profile, the subscriber base is not going to increase dramatically.
At the moment, this buyout seems to be something cooked up by bankers and accountants rather than some deep strategic thinkers. The Times of London reported that the deal will be funded by a new bond offering from Microsoft. In other words, the company will not need to dip into its massive US $100 billion cash stockpile to pay the Linkedin shareholders.
That is a wise decision. It is much better to have the unwary public pay for a big turkey rather than yourself.
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