Since taking the helm at Microsoft Corporation (MSFT), Satya Nadella has wasted little time. He has taken swift actions to focus the company on cloud computing, but also has bolstered the mobile business with app development on platforms from rivals like Alphabet Inc (GOOG) and Apple Inc. (AAPL).
But perhaps the biggest bet is the company’s announcement to shell out $26.2 billion for LinkedIn Corp (LNKD). In fact, the deal is likely to have an impact that goes well beyond the core business of MSFT.
And this is not surprising. Major companies understand the risks of transformative acquisitions. Just look at the disastrous deal between AOL and Time Warner Inc (TWX), which was struck at the peak of the dot-com bubble.
But when an industry is undergoing critical changes, there often needs to be serious moves — and often the best way to pull this off is with a game-changing acquisition.
OK then, what are the broader implications of the LinkedIn deal? Well, here’s a look at three:
LinkedIn Deal Impact #1: The Consolidation Wave In Tech
MSFT is in a similar situation to other old-line mega tech operators, such as Qualcomm, Inc. (QCOM), Oracle Corporation (ORCL), SAP SE (ADR) (SAP), International Business Machines Corp. (IBM) and even Apple. That is, they are all trying to transition their legacy technology to cloud computing, mobile, Big Data and analytics. The situation is getting more urgent as growth rates have generally been fairly meager.
Yet, these companies have major advantages. For example, they have massive cash balances, access to low-cost financing, global infrastructures, large customer bases and trusted brands.
So given all this, why hasn’t there been more M&A activity? It could be that the potential suitors have not been willing to sell.
Although, this may be changing — and fast.
Let’s face it, the LinkedIn deal highlights that even a top-notch tech company believes that it does not make sense to be a standalone entity. Perhaps the reasons include the potential for more competition as well as the gut-wrenching volatility in the markets. Earlier in the year, LNKD stock plunged 50% on the news of a weak earnings report.
But there may be other pressures. For example, venture capitalists may be more willing to agree to buyouts of their portfolio companies since the market for initial public offerings has remained awful (the last Silicon Valley tech company to go public was last year!) At the same time, it would seem like a good bet that activist investors will look at pushing for change as well.
Then what might be some of the targets? Granted, such predictions are mostly speculative. But for those investors willing to take the risks, there may be opportunities with other tech stocks that have gotten beaten up like LNKD stock. Examples include Tableau Software Inc (DATA), Fitbit Inc (FIT) and Twitter Inc (TWTR).
LinkedIn Deal Impact #2: Salesforce Could Be In Trouble
So far, Salesforce.com, Inc. (CRM) is the leader in the cloud business. But this could be in jeopardy. The industry opportunity is just too important for the top tech operators to lose. According to research from Gartner, the cloud market is expected to grow from $175 billion in 2015 to a whopping $315 billion in 2019.
Keep in mind that MSFT already has a large customer relationship management business, with its Dynamics platform. But with LNKD, the offering will be much stronger.
In other words, MSFT will have a CRM product that will not only help salespeople manage leads, but also get net prospects through LinkedIn’s extensive database of 433 million resumes.
Besides, MSFT has other great cloud assets, such as Office, Outlook, Skype, Yammer (which is an internal social network for businesses) and Cortana. For the most part, it would be incredibly difficult — if not impossible — for a company like Salesforce.com to provide all these kinds of services.
LinkedIn Deal Impact #3: Ominous Signs For The U.S. Economy
A key reason for the volatility in LNKD stock has been the slowing of not only the advertising business, but also recruiting fees (which account for two-thirds of overall revenues). Interestingly enough, these are also highly sensitive to changes in the macro economy.
No doubt, the U.S. job growth has been decelerating. But there has also been uncertainty with the upcoming presidential election, which has been contentious. In light of all this, it seems reasonable that consumers and businesses have gotten more cautious.
But there are also signs of slow growth across the world. China remains dicey and Europe could face even more problems, especially with the threat of the UK breaking from the European Union. As seen this week, the yields on 10-year German government debt have gone below zero.
So if there is a recession, this may be yet another reason for tech companies to think about selling out, further accelerating the consolidation wave. After all, the LNKD negotiations got started in early February, when the company reported it’s terrible quarter.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.