For the founders, employees and venture capital investors in LinkedIn (NYSE:LNKD), a $9 billion valuation is something to celebrate. But there is a problem: Wall Street has extremely high expectations for the company. So if there is even a slight disappointment, the stock could easily crater.
What to do? One idea is to ramp up acquisitions. After all, if the stock has an inflated value, LinkedIn might as well take advantage of it.
To understand the math, let’s take an example. Assuming LinkedIn generates $500 million in revenue in 2011 — the company will have a price-to-revenue multiple of about 18 (a price-to-earnings multiple would be mostly meaningless since the earnings are fairly small). Now suppose it buys XYZ Corp. for $500 million, which has a value of 5 times revenue. When LinkedIn adds the $100 million to its top line, it will get a 20X boost. In other words, it will add a whopping $2 billion to the market cap!
It’s true financial engineering — and Wall Street loves it (hey, it generates juicy fees).
So what might be some of the potential buyout targets? Here’s a look:
Monster Worldwide (NYSE:MWW): Funny enough, this company was the LinkedIn of the 1990s and reached a peak valuation of $9 billion (eerie, huh?) Now the value is a much more reasonable $1.8 billion.
Yet as employment improves in the US, so should the fortunes of Monster. And even though more people are using social networks to find jobs, the fact is that traditional job boards are still quite popular and useful.
Moreover, Monster has a great brand, with operations in over 50 countries. If anything, LinkedIn could learn from the company’s marketing prowess.
Cornerstone OnDemand (Nasdaq:CSOD): The company has Web-based applications for helping companies with recruiting and retaining employees. Capabilities include learning management, enterprise social networking, performance management, succession planning and extended enterprise. Such things would be a nice complement to LinkedIn’s corporate member base.
And it’s a big market opportunity — IDC estimates the size at about $3.6 billion.
Cornerstone is growing at a rapid rate. In the first quarter, revenues spiked 63% to $15.7 million and bookings were up 55% to $14.3 million. A critical part of the success has been a partnership with ADP (NYSE:ADP).
BranchOut: No doubt, LinkedIn will be looking to buy startups. True, there will not be much of a revenue lift, but smaller companies will be important for getting new technologies.
One possibility is to buy BranchOut, which is a professional network that is integrated into Facebook. It’s a smart idea since there is no need to educate its users. And of course, Facebook already has about 700 million members.
Launched less than a year ago, the company just raised $18 million in early May. The investors include top-notch venture capital firms like Accel Partners, Redpoint Ventures, Norwest Venture Partners, Floodgate Fund.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
