The biggest tech deal since the 2000 dot-com boom (namely Time Warner & AOL) : Microsoft all cash deal to acquire LinkedIn at 26 billion dollars.
The deal can spell a horrendous future for Microsoft shareholders. For one, LinkedIn is not in the software business. It will not complement, in any way, to Microsoft’s core business. Furthermore, it is not news that LinkedIn is losing money, lots and lots of money. The deal allows LinkedIn to continue operating in independence. That means most likely the loss will continue, unless something fundamental changes. Thus, the two companies will fit in poorly, and the frictions will only worsen the efficiency of the separate organizations.
Current, we are seeing money being virtually free. Since the three rounds of Q.E., companies across the US can essentially borrow money at zero cost, with only benefits of tax shield. Surely, companies are going to take advantage of the current situation. However, this will likely spell trouble for not only Microsoft, but companies with high leverage ratio in general once the Fed decides to actually raise the interest rates for the first time in almost a decade.
In the recent years, Microsoft has made a list of failed acquisitions. In 2011, they acquired Nokia with over 9 billion dollars only to find out they had wasted all of the money. They recently wrote off 8 billion that they spent on Nokia, but apparently the lesson was not taken to heart, as 26 billion was just paid to buy LinkedIn. Later, they acquired Skype, Yammer, and Mojang. None of these complement Microsoft’s core business and hence are causing troubles for the company. To me, it looks like that company is trying to artificially create growth by acquiring. Since the debt is free, the company’s management is resorting to this unsustainable way of expanding. I believe it is a major red alert for the investors.
LinkedIn has a respectable number of users. However, by further examination, it is exceedingly clear to any person with reason that the business model is failing. For one, only less than a quarter of the users are monthly users. That means most of the users do not access the website often and serve just as a number in the company’s report. I even question how many users were created by the company itself. Secondly, any users of the website know that it is extreme rare that someone can actually benefit from the job opportunities found on the site. Apart from the numerous fake users on the site, LinkedIn suffers tremendously from the spamming reputation. People you don’t know, from companies that you have never heard of, will keep sending you recruitment emails that are obviously worded in a way for it to be mass sent to 2000 other people. Firms do not rely on LinkedIn. End of the story. There is little market to be extracted. Now, it is only worse that it is being with a company who is not conservative financially and whose core business has little to do LinkedIn.
I’d like to raise some questions about Microsoft’s management, and I believe Satya’s days are definitely numbered if he artificially creates growths like people did with the synergies in the 70s.