Microsoft Corporation (MSFT) was prominently in the headlines this week as it inked its biggest deal ever, agreeing to acquire LinkedIn Corp (LNKD) for $26.2 billion.
The $196-per-share price tag was a 50% premium over the previous close, and LNKD popped more than 46% last Monday on the news. Microsoft stock, on the other hand, traded lower.
As part of the deal, LinkedIn CEO Jeff Weiner will maintain his current post at the company and will report to Microsoft CEO Satya Nadella. The acquisition was approved unanimously by both of the companies’ boards (although it’s still subject to approval by LNKD shareholders and regulators), and is expected to close by the end of this year.
What MSFT Sees in Deal
While many have questioned whether LinkedIn is truly worth more than $26 billion, Microsoft was actually able to buy the company at a steal compared to what it could have been worth a year ago.
LNKD has performed well in recent years, increasing revenue from $522 million to $2.991 billion between 2011 and 2015.
The membership base to its flagship professional networking website has continued to grow through the years, but it’s also becoming increasingly more expensive to maintain the spectacular growth rate. As a result, management provided weaker-than-expected forward guidance in their fourth-quarter earnings report back in February, which sent the shares tanking to a new 52-week low.
For the full year, the company is expecting revenue of $3.6 billion to $3.7 billion and earnings of $3.05-$3.20 a share. Analysts on the Street had been looking for revenue of $3.9 billion and earnings closer to $3.67 a share.
The shares fell 44% on the disappointment, and I don’t think it’s a coincidence that LNKD and MSFT’s CEOs began talking behind closed doors not long after.
Rumors had been circulating around Wall Street that Microsoft was on the prowl to make an acquisition, but what motivated the company to officially sign the contract is the potential that LNKD brings to the table in terms of the cloud.
As I’m sure many of you already know, LinkedIn is a leading tool for professionals not only seeking employment, but for those simply looking to grow or maintain their professional brand. It’s extremely unique and difficult to replicate, and that’s what Microsoft stock was looking to capture. According to Nadella, bringing the two companies together will allow them to “accelerate the growth of LinkedIn, as well as Microsoft Office 365 and Dynamics.”
As mentioned, LNKD skyrocketed after news of the acquisition, while MSFT pulled back. As a major component of both the Dow Jones and the NASDAQ, MSFT weighed on the market as a whole as the stock pulled back to retest its April lows on huge volume. For now, that longer-term support has held.
In the end, I think this is a great deal for both companies, particularly Microsoft, as it once again puts the spotlight on cloud-based businesses.
What we’re seeing could be the beginnings of a major force in the brave new world of artificial intelligence, cloud computers, the Internet of Things (IoT) and so much more, all of which will provide us with transformative investment opportunities.
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Editor’s Note: This article wrongly originally listed the Microsoft/LinkedIn deal at $26.2 million, not billion.
