In February, professional social media network LinkedIn revealed that it forecasted weaker growth for the year than expected. The news wasn’t received well - shares plummeted by 40% and ultimately fell from around the $225 mark at the beginning of 2016 to close to $100 just a month later. The huge downturn posed a greater problem than displeased investors, too, given that LinkedIn’s employees are largely paid in stock. There have been serious concerns about the company’s ability to hold down its key talent, and some problematic financial reporting had the company in something of a rough patch.
Why, then, would Microsoft sweep in to acquire the company for an eye-watering $26 billion? The largest acquisition in the company’s history is bigger than Facebook’s $22 billion purchase of WhatsApp, and immediately made headlines when announced thanks to its sheer scale. The deal is so ludicrously expensive that many commentators believe Microsoft have overpaid - the tech giant is ‘paying $220 for each of LinkedIn’s monthly active users,’ according to the New York Times, compared to the $40 per user Facebook paid for WhatsApp. The New York Times calculate that Microsoft’s takeover is so generous that it ‘puts LinkedIn’s enterprise value at 79 times the social network’s earnings before interest, taxes, depreciation and amortization, or Ebidta, of the 12 months that ended on March 31.’
From LinkedIn’s perspective, the deal actually makes a great deal of sense, despite the natural trepidation its employees will be feeling right now. The reason it makes such sense is somewhat murky as, as reported by CNBC, the company has been stripping out the cost of stock-based compensation, ‘which has the effect of turning losses into gains.’ Essentially, the company fail to acknowledge the payments as expenses, justifying this by noting that the compensation ‘is non cash in nature,’ and arguing that excluding it provides ‘meaningful supplemental information regarding operational performance and liquidity.’
The social media company paid out a huge 96% of its operating income in this form of compensation, a figure far higher than that of other social media behemoths. The practice is heavily criticised by some, who see it as a failure to inform investors and staff of the company’s true financial situation, with analysts also all too keen to ignore the cost in their projections. Facebook changed its policy to include compensation in expenses in April, in a move seen as something of a swipe at companies like LinkedIn, and the likes of Amazon also include the figures. CNBC speculates that LinkedIn would have had to soon present a more realistic earnings report, which would’ve piled up the losses. As the stock price plummeted, so would employee morale, and Microsoft’s takeover has actually come at a very good time for Jeff Weiner and his team.
For Microsoft, on the other hand, the acquisition is as risky as it is huge. The incredible outlay could very feasibly fail to show a solid ROI, particularly when considered that ‘between 70% and 90% of M&As fail to achieve the benefits they initially promised,’ according to Time magazine. Microsoft and LinkedIn actually compliment each other very well, though, and the acquisition could make the tech giant’s move into B2B services considerably smoother. Microsoft themselves have described the coming together as consisting of the ‘world’s leading professional cloud’ and the ‘world’s leading professional network.’ The Verge point to the fact that ‘more than 433 million people use LinkedIn worldwide to network, find jobs, and reconnect with old colleagues’ and importantly, that a great deal of these users actually pay for the site’s premium service.
As well as this, and as pointed out by Forbes’ Grant Feller, Microsoft have actually bought far more than a social network for those looking for a job. The professional applications of the site are obvious, yes, but LinkedIn has slowly but surely established itself as a leading content site. With contributors ranging from Bill Gates to David Cameron, the site is constantly updated and very well read. If Microsoft can work to turn around its financial issues, they have a wildly scaleable and essentially unchallenged social media on their hands.
In terms of what the acquisition means for the future, many have speculated that it will spur fervent M&A activity for the rest of 2016. Twitter is a prime target - like LinkedIn, its stock has been crashing - and Microsoft could go in for what would doubtless be an ever bigger acquisition. The 140-character giant saw shares jump 4% when the acquisition of LinkedIn was announced, having been down beforehand. Speculation over a potential sale of Twitter to Google, Facebook or Microsoft has been rife for years and, with the company struggling under stagnant user growth, a takeover could be very possible. Jack Dorsey, CEO of Twitter, has denied the speculation has any grounding, but Twitter’s struggles have continued. Social media companies with vast swathes of user data will likely be targeted for M&A activity through the year, particularly if the acquisition of LinkedIn proves fruitful.