Microsoft Corporation (NASDAQ:MSFT)’s $26 billion acquisition of LinkedIn Corp (NYSE:LNKD) continues to be a hot topic today as analysts debate the wisdom of the move and its purchase price. Some are reminding investors about the company’s acquisition of Nokia’s devices business, which turned out to be a poor decision because it took a sizable write-off related to that acquisition last year.
LinkedIn has received at least one downgrade following the big news, and some analysts are blasting Microsoft, especially for pay the hefty premium it paid, while others are defending the company and saying that it’s a wise move.
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Pacific Crest downgrades LinkedIn
Pacific Crest analysts Evan Wilson and Tyler Parker downgraded LinkedIn to Sector Weight because they think Microsoft’s 50% premium or $196 per share in cash is the best the social network can get. They also think the timing is right for the company to be acquired as execution over the last year has been difficult.
They think the drama related to the difficult sales reorganization, “expensive” acquisition of Lynda.com, “very disappointing annual guidance,” slow going for Sales Navigator, and its ad network’s “start-stop-start” problems played into the decision to sell to Microsoft. They also believe that being part of Microsoft will enable LinkedIn to “more aggressively pursue new opportunities to monetize its data, while its core business slow.”
Shares of Twitter surged on Monday as investors speculated that the massive acquisition is only the beginning of a huge M&A wave among Internet companies. However, the Pacific Crest team sees Microsoft’s acquisition of LinkedIn as part of the software wave and not necessarily the beginning of an Internet wave. They add that Alphabet, Facebook and Yahoo are “busy with other things” and that this is about focus rather than valuation. The three companies that were most speculated about on Monday were Twitter, Yelp and Zillow Group, but they believe all three will still be around at the end of the year.
Did Microsoft overpay?
MKM Partners analyst Rob Sanderson agrees with the Pacific Crest team that LinkedIn probably won’t get a better offer. He also noted that the acquisition is about software-as-a-service rather than a valuation comparison for social media. Further, he also agrees that the deal doesn’t necessarily mean good things for Twitter or other social media companies.
While some have argued that Microsoft paid too much for LinkedIn, Sanderson notes that the price was a discount compared to other software-as-a-service providers. Salesforce plans to pay about nine times sales for Demandware, while other SaaS companies have been acquired at multiples of seven to ten times. The enterprise value of the LinkedIn deal is 6.3 times 2016 sales.
Nomura analyst Frederick Grieb and team argue the opposite case, however, saying that Microsoft agreed to pay about 6.2 times NTM EV/ revenue, which is slightly higher than the average multiple paid in their “precedent Enterprise Software acquisitions analysis,” which is 4.8 times. Of course it truly depends on how you look at the deal because Nomura is arguing based on software acquisitions, while MKM argues based on SaaS transactions.
Even though they think the deal is expensive, he describes the rationale for it as “compelling” because it will enable the two companies to integrate the “professional cloud” with the “professional network.” They also reference the Nokia deal and adds aQuantive to it, saying that Microsoft’s track record with large acquisitions is “poor,” but they hope that CEO Satya Nadella will be able to make this one successful, as it’s the first major transaction since he took the helm.
LinkedIn isn’t Nokia
While the massive write-down related to the Nokia acquisition indicates that it was a poor decision, JPMorgan analyst Mark Murphy and team note that LinkedIn isn’t Nokia. They describe the social network as “a difficult-to-replicate asset” and believe the deal is a positive for Microsoft. They also see it as a good strategic fit for the two companies because Microsoft will be able to combine its “private profile” of data from Outlook, Exchange and Office 365 with LinkedIn’s “public profiles”
They also say that when “non-current” Microsoft personnel led the Nokia deal, the market share had already declined substantially and was still declining, but the opposite is true for LinkedIn. They add that the social network brings a mostly recurring revenue stream, while Nokia did not because it was about devices.
Microsoft shares pulled back again on Tuesday, declining as much as 0.92% to $49.69, while LinkedIn shares edged lower by as much as 0.1% to $192.01.