Most of the time, most mergers and acquisitions are at least rumored before they become an official reality. The Microsoft Corporation (MSFT) buyout of LinkedIn Corp (LNKD) isn’t one of those times.
Microsoft pretty much shocked the world — and owners of MSFT stock in particular — Monday morning when the company announced it was acquiring professional networking website LinkedIn for a cool $26.2 billion…. all cash. LNKD stock jumped nearly 50% on the news, close to the effective offering price of $196 per share.
The news is exciting, to be sure. It’s the biggest deal MSFT stock owners have ever seen the company make. A membership-oriented website is also relatively unfamiliar territory for Microsoft, and for CEO Satya Nadella.
So, the question is, does the Microsoft-LinkedIn marriage make sense?
Why LinkedIn?
In a letter penned to Microsoft employees shortly after the acquisition was announced Monday morning, Nadella explained:
“Given this is the biggest acquisition for Microsoft since I became CEO, I wanted to share with you how I think about acquisitions overall. To start, I consider if an asset will expand our opportunity — specifically, does it expand our total addressable market? Is this asset riding secular usage and technology trends? And does this asset align with our core business and overall sense of purpose?
The answer to all of those questions with LinkedIn is squarely yes.”
It’s not a bad fit. Odds are good that most anyone using an existing Microsoft product like Office 365 or Windows 10 or Azure is a working professional — or student — and uses LNKD’s product on a fairly regular basis. Establishing one more connection to all these potential profit centers makes it easier to extract revenue from them, and perhaps better integrate/cross-sell complementary products.
Nadella made it clear he envisions LinkedIn changing very little in terms of brand and function, with current LinkedIn CEO Jeff Weiner staying on board and continuing to run the company as an independent entity. Weiner will report directly to Nadella.
What’s Microsoft Getting for Its $26.2 Billion?
LNKD stock has been less than thrilling since its early 2015 peak. It’s now down 52% from that high despite a 33% rebound from its February plunge (a 50% plunge in less than two weeks, by the way, on a disappointing revenue outlook).
That doesn’t mean LinkedIn hasn’t been growing, however. Last quarter’s $860.6 million worth of revenue was 35% stronger than the year-ago top line. And the pros expect strong growth of 25% for the coming year.
While LinkedIn continues to lose money on a GAAP basis mostly thanks to plain ol’ heavy spending, there’s a light at the end of the tunnel, so to speak. One gets the feeling that once LinkedIn turns the spending-for-growth spigot off, LNKD stock could be consistently profitable.
Perhaps Microsoft will be able to help on that front, if for no other reason than being able to share some expenses … although the bigger bullish impact may be with the top line’s growth.
Either way, on an operational basis, LinkedIn has not only been turning a profit, but reliably growing the bottom line. Last year’s non-GAAP profit per share of LNKD stock was a healthy $2.84, up 40% from 2014’s income, and analysts are reasonably expecting a 22% improvement to $3.46 this year.
It’s also worth noting that LinkedIn is in the habit of topping estimates.
Yes, Microsoft paid 56 times 2016’s projected operational earnings to acquire LinkedIn. It’s a pretty penny. It’s not an outrageous price, though, considering what Nadella may be able to do with it.
Bottom Line for MSFT Stock
In the grand scheme of things, it arguably wasn’t the best use of $26.2 billion worth of Microsoft’s $106 billion cash hoard. Many owners of MSFT stock would have rather seen the company vie for Yahoo! Inc.’s (YHOO) core assets — where it has a core competency — and maybe come up with a smartphone that isn’t a complete joke.
The company doesn’t have an impressive presence on the Internet of Things front, either.
Bringing LinkedIn into the fold isn’t a bad idea, though. It’s bringing cash flow growth with it, and there’s little doubt MSFT will be able to make it more than it’s been able to become on its own.
Just don’t expect outright fireworks. Nadella’s mindset has been more about recurring revenue and less about outright one-time product sales, and the LNKD idea only underscores that idea.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
