Monday, June 20, 2016

The Microsoft Acquisition of LinkedIn: A Mid-Summer Night’s Dream or Love’s Labour Lost: Insights From Top PGDM College in Delhi NCR

The top PGDM college in Delhi NCR has spent some exciting times researching the data available on the acquisition of LinkedIn by Microsoft. It has been about a week that the news of Microsoft the leading professional cloud services enterprise, acquiring the world’s leading professional networking services enterprise has hit the markets and reactions have been tumbling from all quarters. At Ishan Institute of Management & Technology, the faculty members of the business school took some time to collect, analyze and interpret data and then reproduce it in capsule form such that the groundwork is done for a path breaking case study on what may be a path breaking acquisition for Microsoft. Yet, the mood that we have embraced is one of cautious optimism. There are many questions to be answered. We have tried answering all of them to the best of our capabilities. Read on for what makes to be a very fine case study for sure.

The Core Competencies of Microsoft & LinkedIn
Microsoft has announced that it has acquired LinkedIn for USD 196 per share in an all cash transaction that is valued at USD 26.2 billion. This figure includes the net cash balance of LinkedIn. Both Microsoft and LinkedIn are brothers in crime when it comes to sharing a common mission. Microsoft’s mission is to empower every person and every organization on the planet to achieve more. LinkedIn’s mission is to connect the world’s professionals to make them more productive and successful. LinkedIn has been a prime target for Microsoft all these years and the former had been eyeing to acquire the latter. What makes LinkedIn as attractive as an acquisition target? Here is the LinkedIn corporate profile in numbers.
Market Penetration of LinkedIn
·        200+countries and territories
·        433 million members
·        19% YoY growth in membership
·        105 million media access units (MAUs)
·        9% YoY growth in MAUs
Growing Engagement
·        60% traffic from mobile segment (49% YoY growth)
·        45 billion quarterly page reviews (34% YoY growth)
·        7 million active job listings (101% YoY growth)
Top line & Bottom Line Results
·        3billion USD revenue (35% YoY growth)
·        2 billion USD talent solutions revenue (41% YoY growth)
·        7 million active job listings (101% YoY growth)

Both Microsoft and LinkedIn work with the market for professional solutions at their respective levels. Here is a look at their individual professional solution offerings.
·        1.2 billion plus Office users
·        300 million plus Windows users
·        70 million plus Office 365MAUs
·        8 million plus Dynamic seats
·        5million plus Azure cloud organizations
·        433 million users
·        105 million MAUs
·        7 million active job listings
·        9 million company pages
·        50,000 active university pages
·        2 million paid subscribers

·        Email
·        Calendar
·        Documents
·        Messages
·        Contacts
·        Collaboration
·        Meetings
·        Customer Accounts
·        Recruiting and Hiring Managers
·        Prospects
·        Jobs
·        Universities
·        Learning
·        Insights
·        Co-workers
The Combined Scenario: The Synergistic Effects of the Acquisition 

Microsoft and LinkedIn both have their unique core competencies as shown above. Both these enterprises are technology based operators and serve the professional segment. In a world where data analytics, social selling and social CRM are becoming the buzzwords, the synergies of the acquisition can significantly alter the way business is done. There is no doubt that the effect on business development is going to be the most telling. The business process maps of marketing function of man organizations can now be streamlined to make decision making even more data centric, assess potential prospects, observe and monitor leads, execute follow up exercises, harness data from social media analytics and put forward a simple centralized pathway to market that is less time consuming and less cluttered. Post the acquisition professionals working in corporate sector, government offices and even in start-ups can look forward to the synchronization of Microsoft 365 apps like email, calendar, collaboration, social intranet, instant messaging, Cortana,Windows, MS Office suite, Skype, Outlook and LinkedIn account. The combined product menu represents the classical hub spoke model where all Microsoft apps can be delivered on demand by tying them to one unique LinkedIn account.

LinkedIn=Windows+ Microsoft Dynamic CRM + Outlook + SharePoint+ Skype+ Yammer + Bing + Office 365 + Cortana

 The User Experience of Microsoft & LinkedIn Combined

This acquisition promises to revolutionize the way marketing and business development is executed. In the near future, business development people may look forward to getting help from Cortana, the digital personal assistant on getting suggestions on professional networking for lead generation by processing insights and information on meetings, collaborations, projects and industry buzz. This shall streamline communication routes between clients and solutions providers and enable the identification and development of opinion leaders, gatekeepers and influencers in business development. Moreover imagine the amplification of the powers of Microsoft CRM Dynamics, once the CRM software app of Microsoft is directly linked through an API to the LinkedIn sales navigator. It shall transform the sales cycle and enable each seller to get real time updates on prospects and clients to achieve faster time to market and higher revenues. Leaders in organizations can have better access to business intelligence knowing where and when their team members collaborate with people inside and outside the organization and thus execute manpower requirement planning accordingly while motivating existing staff to reduce wastage of efforts, time and relationship building in the unproductive areas. The marriage of convenience shall also enable design thinking and development of just in time learning through social media. Staff members can have seamless access to online learning options on LinkedIn and control the same from a single account.

Acquisition Finance, Capital Structure Challenges and Corporate Governance
The deal no doubt looks so good and interesting. Yet, at the beginning of the case study we had mentioned that at Ishan Institute of Management & Technology, one of the top PGDM colleges in Delhi NCR we are embracing a mood of cautious optimism. We spill the beans here.

There are some astounding elements in this case study. The way in which Microsoft has gone about financing the deal should raise a few eyebrows. Why would a corporation that has more than 100 billion USD in cash lying idle in bank accounts wish to opt for debt capital and thus upset the debt to equity ratio in its capital structure? Is the deal overpriced at 196 USD per share? This is particularly the case because the India born CEO of Microsoft, Mr.Satya Nadella is very well aware of the consequences of putting his company down in debt. One of the obvious consequences of the debt capital financing of the deal may be a possible downgrading by credit rating agencies like Moody’s that is bound to have an adverse impact on share prices, market capitalization and eventually earnings per share. There are plausible explanations though.

First, debt capital in the United States is tax deductible. The debt capital can save Microsoft of USD 9 millions in taxes. Second, corporate debt in the United States is 42 times cheaper than corporate equity and thus generates significant savings. This fad of financial engineering is not new to firms in the United States. Apple has resorted to such financial engineering in the recent past and used dividends and share buybacks to repay investors and boost share prices. This financial engineering of debt to share buybacks may though lead to another bubble burst and the United States government must take earnest steps to prevent another subprime crisis.

Coming to the part of corporate governance post the acquisition and a gloss over of the inorganic growth history of Microsoft, there are challenges to be confronted. There is news that Reid Hoffman shall continue as the Chairman of the LinkedIn board and that the CEO, Jeff Wiener shall continue post the acquisition. It has also been said that Microsoft and LinkedIn shall continue to retain their respective brands and corporate cultures post the acquisition. One wonders about the path to integrating the organizational structures and modes of operations of both the companies. More over Microsoft has not tasted blood in its recent big ticket acquisitions of big preys.

·       Microsoft acquired Skype in the year 2011 for USD 8.5 billion and Skype has not really worked out to the plans.

·        Microsoft acquired Nokia’s mobile phones division and that too was a dull whimper in terms of share holder value creation.

·        The deal is overvalued to an extent. At USD 196 per share of LinkedIn, Microsoft is paying 91 times the EBITDA over the last 12 months and 26 times the forward earning projections of EBITDA. Moreover LinkedIn makes a grand pay out in ESOP to its employees. LinkedIn lost USD 166 million on USD 2.99 billion in revenue in the year 2014.

At Ishan Institute of Management & Technology, one of the top PGDM colleges in Noida we aim to observe the developments closely as the deal unfolds over the year end. On a closing note a big complement to our very own India born Satya Nadella, the CEO of Microsoft on his first big ticket acquisition.