Microsoft Accelerates Shift to Enterprise with LinkedIn Buy

Potential biggest acquisition deal in tech industry to date

Technology giant Microsoft Corp. (NASDAQ: MSFT) has proposed to acquire professional social network LinkedIn Corp. (NYSE: LNKD) for $26.2 billion in one of the largest technology-industry deals so far, as reported by Bloomberg on June 13th, 2016. Microsoft has made several big acquisitions in the past, and many have not panned out as hoped, with the exception of its 2014 purchase of Mojang AB, the maker of the Minecraft video game. The LinkedIn deal is largely seen as CEO Satya Nadella’s efforts to revamp the company and shift towards software and services delivered over the Internet. Microsoft, which lags behind in the consumer web space that is largely dominated by Alphabet Inc. (NASDAQ: GOOG), the parent company of Google Inc., Facebook Inc. (NASDAQ: FB), and wants to make its presence felt in social tools for professionals. Read more about Microsoft’s latest acquisition bid.

Microsoft’s biggest deal so far

Source: Bloomberg
Source: Bloomberg

Microsoft will pay $196 per share in an all-cash deal, including LinkedIn’s net cash, a 49.5% premium to LinkedIn’s closing price on Friday, June 10th, 2016. LinkedIn will retain its brand name and remain an independent company under CEO Jeff Weiner. The deal is the biggest ever for Microsoft as Nadella turns the focus on business customers with cloud-based services and productivity tools. In a press conference after the announcement of a potential LinkedIn buyout, Microsoft outlined a vision in which a person’s LinkedIn profile could mesh seamlessly with Windows, Outlook, Skype, Office productivity tools like Excel and PowerPoint, and other Microsoft products.

Building synergies

With the LinkedIn buy, Microsoft could build the largest global professional network into a major customer relationship management software system for salespeople, an area currently dominated by Salesforce.com Inc. (NYSE: CRM). LinkedIn’s analytics could help power data tools for Microsoft’s Dynamics, which competes with Salesforce.com in helping companies manage customer relationships.

That apart, the LinkedIn acquisition signals a broader shift in Microsoft’s corporate strategy to become a company that primarily sells online services to business customers. LinkedIn is seen to help Microsoft both broaden the set of business customers it can serve and deepen the relationship with those it already serves. LinkedIn is considered an essential networking tool, with more than 100 million monthly active users.

Source: LinkedIn
Source: LinkedIn

LinkedIn’s talent solutions business, which provides recruiting services, accounted for almost two-thirds of LinkedIn’s $3 billion in revenue in Q1 FY16. LinkedIn also earns revenue by selling premium subscriptions to LinkedIn users and helping users in sales occupations find other users who may be interested in buying their products. Most importantly, LinkedIn is already profitable, which augers well for Microsoft.

Microsoft reinventing itself as a business services company

Buying LinkedIn makes good sense for Microsoft since it represents Nadella’s effort to steer Microsoft from a PC software maker to a company that sells business technology services. Given that Microsoft continues to be popular with business customers, Nadella has focused on expanding and modernizing the company’s business products.

Keeping with this game plan, Microsoft announced on June 1st, 2016, that it is selling about 1,500 of its patents to Chinese device maker Xiaomi. The deal, which revolves around its flagship operating system Windows 10, also includes a patent cross-licensing arrangement as per which Xiaomi will install Microsoft software, including Office and Skype, on its phones and tablets. The Windows 10 platform, which Microsoft launched globally on July 29th, 2015, currently runs on 300 million plus active devices including smartphones, PCs, tablets, and gaming consoles.

LinkedIn complements Microsoft’s shifting business model

It is very obvious that there is a significant overlap between LinkedIn’s user base, corporate professionals, and Microsoft’s customers. LinkedIn is already providing online services rather than selling software, and offers a Facebook-style newsfeed to its users. Microsoft plans to integrate this newsfeed into the Office 365 user interface, allowing users to keep track of developments in their professional network while they are working on a spreadsheet or presentation.

LinkedIn buyout could help Microsoft avoid tax

Although Microsoft is sitting pretty with more than $100 billion in cash and cash equivalents, with most of this cash in offshore accounts, the Company is relying on debt to fund its LinkedIn acquisition. This way, Microsoft could save roughly $9 billion in U.S. taxes in 2016 alone, and save millions in the years ahead by using interest deductions to reduce its taxable income. Microsoft expects the deal, which must be approved by regulators in the U.S., E.U., Canada and Brazil, to generate annual savings of $150 million by 2018. With its latest plan, Microsoft joins many cash-rich U.S. companies that have borrowed debts to avoid taxes. Most notable among these firms is Apple Inc. (NASDAQ: AAPL), with more than $180 billion overseas reserves, but still borrowed $6.5 billion in 2015 to pay dividends to shareholders.

On a negative note, the decision to add another $20 billion plus of debt to buy LinkedIn could hurt its ratings.

Shares Surge

M3LinkedIn shares surged nearly 47% to $192.21 on Monday, June 13th, 2016, their biggest advance since 2011, having opened the day at $129.14. The stock touched a low of $131.74 and a high of $135.72 during the day. The stock’s average trading volume was at 1.56 million. LinkedIn’s market cap was at $25.59 billion as of June 14th, 2016.

Microsoft shares fell 2.6% to $50.14 on Monday, June 13th, 2016, having opened the day at $49.83. The stock touched a low of $49.57 and a high of $50.10 during the day. The stock’s average trading volume was at 42.6 million. Microsoft’s market cap was at $391.69 billion as of June 14th, 2016.

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