With LinkedIn, Microsoft just inked in yet another disaster

Ever had one of those annoying LinkedIn emails inviting you to “endorse” a contact for some skill or another? Perhaps LinkedIn chief executive Jeff Weiner and its founder Reid Hoffman deserve to be endorsed for salesmanship after today’s deal.

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In February, LinkedIn lowered its expectations for the year’s growth in revenue (from 35% to 20%) and adjusted earnings (from 41% to 7%) — well below what analysts expected. So it saw its shares plunge over 30%

Yet today, they convinced Microsoft to shell out a whopping 26.2 bn$ for LinkedIn’s 433 mn users (yes, the purchase consideration does include LinkedIn’s net cash of $1.76 bn ( $3.16 billion of cash – $1.4 billion of convertible and long-term debt); but still.). At 60.5$ per user, you must be kidding. If you consider only the 105 mn Monthly Active users (MAUs), it even higher at 249.5$ per active user

Microsoft already has 1.2 bn users and there exist marginal commonalities; enterprise software and networking are two different ballgames and while Microsft has a history of decently successful acquisitions,  14 mn$ for Powerpoint in 1987, $8.5bn for Skype in 2011,  $7.2bn for Nokia’s mobile phone business in 2013 and 2.5 bn$ for Minecraft in 2014, it will remain to be seem how NPV positive would be this deal. As of now LinkedIn has just 2 mn paid subscribers; so the revenue dynamics are even more mystical.

The LinkedIn acquisition also eclipses the $19bn that Facebook paid for WhatsApp in 2014. FB had  essentially paid  42$ for each user (19 bn/450 mn) or 130$ per user, which is more justified; if we would consider only the incremental Whatsapp users who would become a part of the FB network. Whatsapp continues to remain ads free and devoid of any user charges. Not sure how they justified the decision from a fundamentals (earnings/cashflows, growth and risk) perspective. At least they smartly paid Whatsapp thru Facebook stock and thus hedged themselves from the overpricing risk. So the irrational exuberance risk was at least slightly mitigated. Today was an cash deal (albeit finance through debt) for Microsoft which has been sitting on 92 bn$ mountain of cash. probably the money was pinching it !!

The official version is

“This combination will make it possible for new experiences such as a LinkedIn newsfeed that serves up articles based on the project you are working on and Office suggesting an expert to connect with via LinkedIn to help with a task you’re trying to complete,” says Nadella. As these experiences get more intelligent and delightful, the LinkedIn and Office 365 engagement will grow. And in turn, new opportunities will be created for monetization through individual and organization subscriptions and targeted advertising.”

Not sure, how fair or optimistic is this envisaged marriage of cloud business and social networking.  Maybe yes, there exist great synergies and Microsoft has bought growth.

The only question is “at what price”?

You may wish to think about it

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