In a surprising move, Microsoft (MSFT, Financial) purchased LinkedIn (LNKD, Financial) Monday. Here are highlights of the acquisition:
- Microsoft will pay $26.2 billion for LinkedIn in an all-cash transaction which equals $196 per LinkedIn share.
- The purchase price is net of LinkedIn’s cash balance.
- This is a 46% premium to last Friday’s closing price.
- Jeffrey Weiner will remain the CEO of LinkedIn, and the company will continue to be run independently with its current corporate culture.
The companies believe that they will be able to grow total addressable market (TAM) where Microsoft will be able to cross sell its products to LinkedIn’s users. The combined TAM is expected to be $315 billion. Microsoft envisions an ecosystem where LinkedIn data is available to its products like Dynamics, Outlook, Sharepoint, Excel, Word, Skype and more.
From Microsoft Investor Relations Presentation
Microsoft also has a grander vision of LinkedIn’s data enabling artificial intelligence to better assist users with everyday tasks like setting up meetings or scoping out sales prospects.
My take
I bought Microsoft shares in late 2011 on the thesis that the company was a high quality business despite an ineffective CEO, Steve Ballmer. Ballmer was always two steps behind on technological trends and would attempt to catch up with horrible acquisitions ( i.e., Nokia [NOK]). He did not have a good track record of capital allocation. I had a feeling he was running out of chances and would be replaced when I bought the stock. Ballmer eventually stepped down in mid 2013.
The current CEO, Satya Nadella, started in early 2014 and has done a good job in making Microsoft more focused and less arrogant. Nadella has focused the company on productivity by emphasizing the cloud and also has formed partnerships with former adversaries. Microsoft released the Office suite on Apple’s IOS under his watch. With Nadella at the helm, I was optimistic that Microsoft would have a leader who could milk the business productivity cash cow, grow the intelligent cloud business and create a commercial success from one of the company’s many R&D projects. I was also hopeful for a much more disciplined capital allocator. Those hopes were suddenly dashed with the LinkedIn announcement.
I am extremely skeptical of this latest purchase. First, Microsoft paid a huge premium at over eight times LinkedIn’s TTM sales. Second, the LinkedIn platform is overhyped. Many people could stop using the service, and it would not affect their careers one bit. Lots of people only visit the site and update their profiles once they’re thinking about switching jobs. Third, it’s not clear that this is a good strategic move. In order for this deal to work, LinkedIn needs to retain its user community.
Microsoft needs to be careful how it uses LinkedIn’s information. Its target market consists of professionals who are busy and overloaded. The last thing someone wants is to be cold called about products and services that they don’t want or need. If the end result is that LinkedIn allows salespeople to become more intrusive, many people will stop using the platform. It would be detrimental to Microsoft’s mantra of improving productivity if LinkedIn integration resulted in more spam. I make the comparison to when parents started joining Facebook (FB, Financial) and leaving posts on their children’s newsfeed. Younger people became disenfranchised and migrated to Instagram and Snapchat.
Another analogy I see is with Xbox and the Kinect sensor. Microsoft had a grand vision of the Xbox becoming a home entertainment hub. Instead, many customers were put off by privacy concerns and the possibility that Kinect could spy on its users. In the picture above, Microsoft imagines a world where Cortana, its virtual assistant, can leverage LinkedIn data to alert users with information of nearby business contacts. I suspect privacy may be a concern again.
The LinkedIn purchase fundamentally changes my view about the CEO and his capital allocation discipline. We don’t know if this acquisition will succeed or fail, but we do know that it was expensive. I closed out my Microsoft position today. In my opinion, execution risk is extremely high. Microsoft has a very spotty track record of creating intuitive, easy to use products and services.
Start a free seven-day trial of Premium Membership to GuruFocus.
