Microsoft & LinkedIn – Stolen Thunder

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Microsoft and LinkedIn steal Apple’s thunder. 

• Microsoft has announced that it will acquire LinkedIn for $196 per share or $26.3bn which represents a premium of nearly 50% on Friday’s closing price.
• This is an all cash transaction that Microsoft will finance with the issuance of debt which makes sense as almost all of Microsoft’s cash is trapped overseas.
• This is by far the biggest acquisition that Microsoft has made since Satya Nadella took over as CEO but represents further evidence that Microsoft is increasingly becoming a company focused on the enterprise.
• Linked in has 433m members of which 105m are active each month and where 60% of usage is on mobile devices.
• At $255 per monthly active user, this is a very expensive transaction but given the position that LinkedIn has, this does not concern me greatly.
• This is because, LinkedIn users are predominantly professionals and the monetisation opportunity of a professional is many times greater than that of the average consumer.
• I also view LinkedIn as a true unicorn rather than a donkey (see here) as it remains effectively unopposed in its space and is single-handedly disrupting almost the entire recruitment industry.
• Consequently, if this acquisition is executed correctly, it could deliver value to Microsoft that goes way beyond the $26.3bn price paid.
• The synergies are obvious and include:
  • First. Office can use LinkedIn’s profiles, identities and connections to make its productivity and experience far better.
  • Second. Dynamics (CRM) should be enhanced with LinkedIn’s data and should help fill the gap left after Microsoft’s advances to Salesforce.com came to nothing.
  • Third. A big improvement for collaboration, communication and enterprise social networking which is somewhere where I think Microsoft is having difficulty.
  • Fourth, Cortana can become smarter and more pervasive by having access to LinkedIn’s data and by also being present while users are working with LinkedIn’s services.
• However, it is with the realisation of these synergies that my concerns begin.
• Microsoft does not have a good history at making the most of its acquisitions and making the most of LinkedIn represents a real challenge.
• This is because LinkedIn will continue to operate independently of Microsoft and so how closely the companies will work together is a real question.
• I think that the key to this acquisition will be using LinkedIn’s network, data and its assets to make Office, Dynamics and Cortana more compelling for its subscribers.
• If LinkedIn and Microsoft can make improve the productivity and ease of use of LinkedIn then that could really help with converting millions of free users of Office 365 to becoming subscribers as well as making Dynamics much more sticky.
• It also positions Microsoft very nicely for the emerging social networking activity that goes on both inside corporations and between professional users in an enterprise context.
• However, for all of this to work, LinkedIn’s systems and data has to become deeply integrated with those of Microsoft which with the companies remaining independent, will be orders of magnitude more difficult.
• The critical measures here are Radio Free Mobile’s Laws of Robotics No. 5 (Data Sharing) and No. 6 (Data Integration).
• These laws state that apps on devices must be able to share data (5) and that an ecosystem must understand its users as a complete profile of all his activities (6).
• This means that LinkedIn’s data that it keeps on its user base has to be integrated with Microsoft’s.
• This is where the problems begin because Microsoft itself scores very badly against Law No. 6 as most of its own services have user databases that are completely separate from all of its other services.
• If LinkedIn is going to be integrated, which one of Microsoft’s databases should it be integrated with?
• The correct answer is all of them but in reality, until Microsoft can sort out its own failings against this test, it is unlikely to be able to do much with LinkedIn’s.
• Furthermore, I think that this has to be done properly as a sticking plaster approach with something like single sign on will simply not deliver the promised synergies.
• Hence, while I do not have a problem with the high price paid or with the rationale of the transaction, it has to be flawlessly executed for Microsoft to see a good return on this substantial investment.
• With Microsoft back at $50 per share, there is still room for upside and I continue to prefer it to Google, Twitter, Alibaba and Amazon.