On June 13, Microsoft (NASDAQ:MSFT) reached a deal to acquire LinkedIn (NYSE:LNKD) for $26.2 billion, or $196 a share, also with a 50% premium to the closing price on June 12th. This transaction likely ranks among the biggest in tech of all time, and will probably be the biggest this year.
This might seem like exciting news for Microsoft shareholders; and it is exciting news for LinkedIn shareholders - really exciting. However, to quote Harvard Business Review. "M&A is a mug's game: Typically 70%-90% of acquisitions are abysmal failures." HBR also specifically calls out companies that are trying to enter a market as specific targets for failure, as Microsoft is trying to in this situation.
Microsoft has mainly missed out on the social space over the past decade-ish period of time, and LinkedIn functions as a way to leapfrog ahead of the competition in the newly hot "business social network" segment, much like Slack and Hipchat. Again, as HBR states, I believe this is a classic case of a large player trying to muscle into a segment it doesn't particularly understand, and overpaying by billions in the process.
A pattern that has evolved over the years, however, is that usually the larger the acquisition, the more likely it is to fail. Take Microsoft's own past failures for example: Skype, Yammer, and aQuantative. Microsoft paid $8.5 billion for Skype in 2011, and it literally doesn't show up in its earnings releases now at all. Yammer has never been mentioned again as well, and aQuantative was literally almost completely written off, after Microsoft bought it for $6.5 billion.
Also, to me, as a business, LinkedIn does not strike me as a high quality business. LinkedIn gets money from premium subscriptions and advertising, but the majority of its revenue comes from Talent solutions, or recruiting. Essentially, LinkedIn is a big repository for computerized resumes. This shows in the usage of it; how many people have actually used LinkedIn as a social network? LinkedIn literally charges you to send "Inmails", which to me seems like a massive blocker of trying to be social.
Off the backs of the inherent difficulties of trying to successfully do M&A, there is also the challenge of trying to find synergies with LinkedIn with the rest of Microsoft, and frankly, I see none. Microsoft has even gone so far as to say that they will not be trying to integrate LinkedIn, and LinkedIn will essentially remain separate from the rest of Microsoft.
LinkedIn is a primarily HR recruiting tool, and while LinkedIn might have been sold and rebranded to Microsoft and Nadella as a "hip enterprise social network", that could not be further from the truth.
I foresee this acquisition going badly, plainly put; and even if it doesn't and LinkedIn manages to magically integrate well with Microsoft, Microsoft will likely never get a economic return on LinkedIn commensurate for the risk it took. LinkedIn has only made slight profits in the past, and in the past few years has seen its profitability dive into the negative. Bulls will point to its high cash flow, but share based compensation removes most of that. Contrary to popular belief, share based compensation is a real expense as shareholders pay for it with dilution.
Even without share based compensation as an expense, if we wave it away by magic, LinkedIn is still being bought for about 50-60 times cash flow. While this may be great for LinkedIn shareholders, Microsoft shareholders will be paying dearly.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.