Did Microsoft Waste $26 Billion On LinkedIn?

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Microsoft announced this morning that it will acquire LinkedIn for $26.2 billion, and investors seem to think it wasn’t a great move. While LinkedIn shares exploded immediately after the announcement, climbing by about 47% to as high as $192.30, Microsoft stock pulled back by about 3% to hover just under $50 per share.

So was this a wise move on Microsoft’s part, or did it just waste billions of dollars on a company it really doesn’t need. As with anything, it depends entirely on who you ask.

Microsoft gives LinkedIn a massive valuation

Forbes contributor Peter Cohan argues that Microsoft’s acquisition of LinkedIn doesn’t pass the four tests that mark an acquisition as “successful.” He says the transaction is essentially a rescue plan for LinkedIn amid is “huge growth problem” but adds that it’s not clear how Microsoft will be able to see returns on the $26.2 billion or $196 per share, all in cash, it will pay for the social network. The purchase price represents a nearly 50% premium on Friday’s closing share price for LinkedIn. It also slaps a value of 91 times EBITDA, reports Bloomberg.

In an interview with the media outlet, Microsoft CEO Satya Nadella said they intend to make “LinkedIn the social fabric for all of Office.”

Microsoft’s acquisition of LinkedIn fails the tests

So what are these four tests Cohan says the deal fails? One is about whether the industry is attractive, and he does not believe that business social networking is attractive. He said if it were, LinkedIn, as one of the leaders, would be profitable. However, the social network lost $166 million on $29.9 billion in revenue last year.

The second test is that the companies would be better off if combined, and he said that he sees no scenario in which the two companies would be better together than they are separate. He doesn’t believe that Microsoft will be able to revive growth at LinkedIn.

Third, he doesn’t believe Microsoft will enjoy a positive net present value on the deal, although he admits that he hasn’t reviewed the financial projections that caused the company to justify the huge premium it is paying for the social network. He adds though that since LinkedIn is operating at a loss, it seems very unlikely that it will increase Microsoft’s cash flow enough for it to earn back the purchase price. Further, he explains that even if LinkedIn is able to almost quadruple its EBITDA to $1 billion this year, Microsoft is still paying too much for it.

The fourth test deals with integration of the companies, which Cohan says will be difficult. He questions how LinkedIn CEO Jeff Weiner will be able to keep being the social network’s chief executive because while he may still head it up, he won’t be CEO anymore because he will report to Nadella. He also wonders what Weiner will have to do to add new services, make an acquisition or target new customers. Further, he’s skeptical that LinkedIn employees will want to stay after the social network is bought by Microsoft.

The other side of the argument

ZDNet‘s Mary Jo Foley takes the other side of the debate and contends that Microsoft is making the acquisition to get LinkedIn’s data more than anything else. She notes that both companies have been building their own knowledge graphs but adds that there isn’t much overlap in the graphs, although both are related to business professionals. She also sees the possibility of synergies between the social network and Office 365, Dynamics CRM/ ERP and Microsoft’s ad services and products.

Microsoft management emphasized this morning that they view the transaction as uniting “the professional network” with “the professional cloud.” Foley explains that the company’s knowledge graph includes information on messages, calendar entries, documents and messages, while LinkedIn’s knowledge graph is more about jobs, coworkers, learning, recruiting, and prospects. As a result, she contends that the two collections of information go together but don’t overlap much.

After the combination, Microsoft hopes LinkedIn will consolidate the data of business users across the various services and apps. The company also aims to develop a sort of newsfeed which includes all of the professional user’s information, such as their contacts, industry, and profession, while surfacing additional areas where Cortana can be integrated.

The company also hopes the social network will improve prospecting and gathering customer information for its Dynamics CRM service. Additionally, LinkedIn’s ownership of training website Lynda.com could help expand its business offerings, particularly in certification and education in its products and services. Microsoft also hopes the social network will improve Bing, turning it into “the best professional search.”

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