Acquisition Big Boost for Microsoft Stock
Microsoft Corporation (NASDAQ:MSFT) stock did not have a good start this week. The reason is simple: the company just announced a $26.2-billion deal to acquire LinkedIn Corp (NYSE:LNKD).
On the day of the announcement, Microsoft stock slipped as much as three percent. LinkedIn stock, on the other hand, skyrocketed 48%.
While it’s not uncommon for the acquirer’s stock price to drop on a merger announcement, some investors were genuinely worried about Microsoft. One of the reasons for such concern is the price. Microsoft is paying $196.00 for each LinkedIn share, a 50% premium over the company’s closing price on Friday. (Source: “Microsoft to Acquire LinkedIn,” Microsoft Corporation, June 13, 2016.)
Still, by spending $26.2 billion, Microsoft is going to get a very unique asset—LinkedIn’s userbase.
By the end of the first quarter, LinkedIn had 433 cumulative members. Its monthly active users (MAUs)—a commonly used measure in the social network business—are also quite impressive at 106 million. (Source: “LinkedIn Announces First Quarter 2016 Results,” LinkedIn Corp, April 28, 2016.)
Some would say that those numbers cannot really match other social network companies. For instance, Twitter Inc (NYSE:TWTR) had 310 MAUs in the first quarter and its market cap is just above $10.0 billion, much less than what Microsoft paid for LinkedIn.
The main point is that there is more to LinkedIn than just plain numbers. The company’s platform is different from all other social networks in that it’s indispensable to job seekers and human resources (HR) professionals.
Of course, what MSFT stock investors really want to know is how the deal will benefit Microsoft. And on that front, Microsoft CEO Satya Nadella gave a clear answer in an interview: “It’s really the coming together of the professional cloud and the professional network.” (Source: “Microsoft to Acquire LinkedIn for $26.2 Billion,” The Wall Street Journal, June 13, 2016.)
In particular, Microsoft offers its “Office” productivity suite, which now has over 1.2 billion users. Today, Microsoft Office is not just some software you install through the CD-drive. Instead, since the release of its latest version—“Office 365”—the product has been mostly delivered online. Also, Microsoft wants to learn more about its users, many of whom are professionals. According to its presentation, Office 365 has more than 70 million commercial MAUs. (Source: “Investor Presentation,” Microsoft Corporation, June 13, 2016.)
That’s where LinkedIn comes into play. It’s safe to say that a lot of LinkedIn’s 433 million members are familiar with Microsoft’s products, such as the Office productivity suite. If Microsoft can convince LinkedIn’s members to use their identities across its product range, the information Microsoft could gather would be invaluable.
At the same time, LinkedIn’s data could also benefit Microsoft’s “Customer Relationship Management” (CRM) software. Essentially, CRM aims to improve business relationships with customers through the analysis of customer interactions and data. And what kind of data would be better than the millions of professional profiles and their networks in LinkedIn’s database?
Don’t forget that on its own, LinkedIn is already running a solid business. Its stock price was beaten down after its weaker-than-expected guidance back in February. Recently, though, things have started looking a lot better.
In the latest earnings report, LinkedIn showed a 35% year-over-year increase in revenue to $861 million, beating Wall Street’s expectation of $828 million. The company also reported adjusted earnings of $0.74 a share, smashing analysts’ estimates of $0.60. With a booming “Talent Solutions” segment, LinkedIn has a lot more growth potential to realize.
The Bottom Line on MSFT Stock
No doubt, this acquisition announcement is a big deal for Microsoft stock investors. At $26.2 billion, LinkedIn is Microsoft’s largest acquisition to date. In the past, not all acquisitions went that well. The market still remembers Microsoft’s massive write-downs after buying Nokia Corp’s handset unit.
This time, though, things couldn’t be more different. LinkedIn has a unique asset that no other company has. If Microsoft can combine its professional cloud with LinkedIn’s giant professional network, MSFT stock could see massive upside ahead.