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Is Microsoft’s bid for LinkedIn more than an attempt to reinvent itself?

Is Microsoft’s bid for LinkedIn more than an attempt to reinvent itself?

15-06-2016 | Insight

Microsoft has launched a takeover bid for LinkedIn for USD 26 billion. A desperate move or a well-timed bid to reinvent itself?

  • Jack  Neele
    Jack
    Neele
    Portfolio Manager Robeco Global Consumer Trends Equities
  • Michiel  Plakman
    Michiel
    Plakman
    Portfoliomanager Robeco Global Stars Equities

Speed read

  • Microsoft's bid is around the level of LinkedIn's share price in January.
  • Microsoft is now focusing exclusively on the business market.
  • Growth at LinkedIn has slowed dramatically

For anyone who thought that Microsoft was just a relic from former times – a remnant left over from the IT hype of the last century, long since overtaken by younger trendier companies that are able to connect with their consumers far more effectively – this week's news may well have made them think again. Yes, that's right. In recent years, Microsoft has been obliterated in the consumer market, but its takeover of LinkedIn for USD 26 billion, shows that the company is still both alive and kicking, and highly ambitious.

“Historically, Microsoft has been strong when it comes to ‘enterprise productivity’, with Office (Excel, Word, PowerPoint, SharePoint) and with Skype for Business”, says Jack Neele, Portfolio Manager of Robeco Global Consumer Trends. “People now also work with all these products via the cloud – and as far as the cloud is concerned Microsoft is the world's number two. It’s true they have fallen a long way behind in the field of social networking, but are now taking a major step in this area in terms of the business segment of the market.”

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Slower growth for LinkedIn

Neele thinks that Microsoft feels that it can increase its value with a combination of cloud products and a business networking platform. So it is not really surprising from the buyer's point of view that they should end up knocking on LinkedIn's door. Microsoft is a strong player in the business market but a lightweight when it comes to social networking. Neele is more surprised by the fact that LinkedIn apparently thought it was necessary to join forces with a major player. “It may indicate that they see little potential for ongoing success if they continue to go it alone.”

The growth slowdown the business networking platform has experienced in recent months was probably already an indication. “LinkedIn's growth has contracted significantly to around the 30-35% level in the last quarter. The stock was hit hard after the company published disappointing figures and Microsoft is cleverly taking advantage of the dip and using around a quarter of its cash reserves to make the purchase.”

At 50% above the current price, the bid may appear to be high – a normal takeover premium is around 30% above the share price – but that's not really the case. Timing is everything and that applies in this case too. The bid of USD 196 per share is not far off the price where LinkedIn was trading at the beginning of this year. And according to rumors, Microsoft and LinkedIn have been discussing the deal since round about then.

Microsoft alive and kicking in the business market

However, investors are less impressed by Microsoft’s actions. While LinkedIn's stock shot up to around the level of the bid, Microsoft's share price fell by around 3%. Although Neele thinks that the takeover is a logical step forward for Microsoft, he doesn't think that it marks the start of a new wave of takeovers. Perhaps a company like Twitter might be interesting for a party like Google, but that's about it.

‘Microsoft is paying USD 26 billion – but what exactly are they getting for that sum?’

“Facebook, Google and Amazon are today’s major platforms. Microsoft dates back to a bygone era and is trying to strengthen its position in the business market, having been crushed by the other players in the consumer market. But Microsoft applications are now also available on, iPhones, for example. This was unthinkable until recently, so in that sense the company is moving forward. Whereas not long ago some analysts were describing the company as ‘a dead man walking', there now appears to be life in the company and a future for Microsoft.

Paying for potential

Michiel Plakman, who is responsible for the IT sector within the Robeco Fund portfolio management team, is not so enthusiast about the deal. “Microsoft is paying USD 26 billion – but what exactly are they getting for that sum? LinkedIn generates hardly any cash flow, has revenues of USD 3.5 billion, so that means you are paying a lot for goodwill and for a future potential you're not certain will ever materialize.”

There is plenty of uncertainty when it comes to the merits of this deal. Plakman understands that Microsoft wants to expand its Office 365 package. “The idea on which the takeover is based is a sound one, but the question remains whether the level of the bid justifies this.”