15 July 2016

Microsoft to buy LinkedIn

Last month, information technology giant Microsoft agreed to purchase business-focused social networking firm LinkedIn for around USD 26,200 million. Under the terms of the acquisition, Microsoft will pay USD 196 per share in cash, which represents a 50 per cent premium over the target’s close of USD 131 on 10th June, the last trading day prior to the deal being announced.

While the boards at both companies have agreed to the deal, regulatory and shareholder approvals are required before completion, which is expected to take place by the end of the year. The acquisition is set to be Microsoft’s largest to date, according to Zephyr, the M&A database published by Bureau van Dijk.

Some may question if the high premium is justifiable. Microsoft, no doubt, sees huge potential in LinkedIn. In a statement, Microsoft’s chief executive Satya Nadella said: “Jeff [LinkedIn’s chief executive] and I both believe we have a significant opportunity to accelerate LinkedIn’s growth and the value it brings to its members with Microsoft’s assets and scale.

However, based on LinkedIn’s financial results, its revenue growth has been gradually losing steam since 2012. The company also reported a net loss of USD 165 million in 2015, compared to the USD 15 million net loss recorded in the previous year. This concerned investors, causing LinkedIn’s share price to plunge 44 per cent on 5th February 2016.

In terms of large acquisitions, history is not on Microsoft’s side, either. Last year, the company decided to write off USD 7,600 million from its Nokia handset unit, erasing almost all of its value from the books. Similarly, Microsoft resorted to a USD 6,200 million writedown on online marketing provider aQuantive, a company it purchased for about USD 6,300 million in 2007. Microsoft has also yet to yield substantial benefits from the acquisition of communication software developer Skype, which cost the buyer USD 8,500 million in 2011.

To be fair, however, these deals were made prior to Nadella’s tenure. According to Dan Gallagher of the Wall Street Journal, Microsoft has become more selective in terms of deal making since Nadella took office in 2014.

Nadella plans to merge LinkedIn’s vast database of user information with Microsoft’s Office 365 (a group of software subscriptions, which encompasses Microsoft Office applications and business-related social networking services) and Dynamics (a line of enterprise resource planning and customer relationship management applications). He reckons professionals who are finding jobs and doing business require a vibrant network, which is what the merged entity will provide.

With the combined resources of both companies, Microsoft aims to introduce new features, such as a LinkedIn newsfeed that shows articles relating to a user’s work, as well as a function that recommends an expert for assistance on a project. Nadella believes that when these features become smarter, user engagement will increase, which will create new monetisation opportunities through subscriptions and targeted advertising.

Last year, Microsoft was in talks to buy Salesforce, a customer data solutions provider, for around USD 55,000 million. However, the deal failed to materialise as both parties could not agree to a price for the acquisition. Interestingly, Salesforce then decided to vie with Microsoft for LinkedIn. Salesforce, however, failed to outbid its rival.

Microsoft has appointed Morgan Stanley as a financial advisor on the LinkedIn acquisition, while Qatalyst Partners and Allen & Company are assisting the target.

© Zephyr