SKARBECK: Pricey LinkedIn purchase reflects frenzy over cloud

June 25, 2016

Ken SkarbeckMicrosoft threw a curveball to investors this month with its $26.2 billion purchase of LinkedIn. The $196-per-share cash offer was 47 percent above LinkedIn’s stock price of $133 per share.

Many tech industry analysts like the deal. LinkedIn has 430 million registered users, although only 106 million were active last quarter. One observer justified the acquisition saying Microsoft “gains one of the most exclusive sets of business data on the planet.” Microsoft could use its Office 365 software and LinkedIn’s database to connect salespeople with qualified prospects. Companies are scrambling to access “big data” analytics and are seeking to mine information that allows businesses to function better.

Bill Gates weighed in that he was very encouraged by the deal and sees lots of synergies. Gates views the Microsoft LinkedIn combination as a business network for career opportunities and compared it to what Facebook has done with social communities.

The deal also has its naysayers. First of all, the price is a head-scratcher. The $26 billion price tag is, by far, the largest acquisition in Microsoft’s history and will define the future for CEO Satya Nadella. Like any acquisition, success comes down to the price paid versus the value received. Microsoft is paying more than six times revenue for a company that lost $150 million last year. Also, over the last two years, LinkedIn has doled out more than $1 billion in stock-based compensation—marvelous if you are an employee, but unjustifiable if you are a shareholder.

Another concern is that Microsoft’s acquisition track record is poor. Nadella became CEO in 2014, taking over for Steve Ballmer. Under Ballmer’s watch, Microsoft purchased Nokia’s device business for $9.4 billion and internet advertiser aQuantive for $6.3 billion. Both businesses were eventually written down as complete losses. In addition, the $8.5 billion purchase of Skype in 2011 still hasn’t materialized into a financial success. Ballmer also tried to buy Yahoo in 2008 for $48 billion, but luckily for Microsoft shareholders, that deal never was completed.

Microsoft will fund the LinkedIn purchase by issuing $25 billion in debt, adding to a debt load that has already increased $15 billion the past year. The company has $103 billion in cash but most of it, $96 billion, is held overseas and would be subject to U.S. tax if it were brought back to use in this acquisition. Even though interest rates are low and Microsoft’s balance sheet can handle the new debt, Moody’s has put Microsoft’s AAA rating under review for downgrade.

In the end, this deal is about Wall Street’s love for cloud-based businesses. Investors are willing to pay nosebleed prices for firms like Salesforce.com, Workday, ServiceNow, NetSuite, Box and Adobe. For now, sales growth trumps valuation—and profits remain elusive.

Apparently, Salesforce.com had considered making a bid for LinkedIn, which might explain why Microsoft felt it had to move. Microsoft’s LinkedIn deal is evidence that older tech companies are under pressure to join the cloud party. While the large, mature tech companies like Microsoft, IBM and Oracle are desperate to show sales growth, only time will tell if acquiring cloud-based businesses will generate significant profits.

Finally, it’s worth mentioning that one of the key advisers to LinkedIn in this deal was none other than dot-com investment banker Frank Quattrone.•


Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.


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