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The expensive LinkedIn dream

Microsoft might have big dreams of what life will be like after it completes the takeover of LinkedIn and Billy MacInnes wonders what they are

“I can’t wait to see what our teams dream up when we can begin working together once the deal closes, which we expect will happen this calendar year.” The words of Microsoft CEO Satya Nadella in a letter to the company’s employees on 13 June outlining the company’s decision to spend $26.2bn to acquire LinkedIn.

Now, call me old-fashioned but if I was spending $26,2bn cash on a business, I would like to have a very clear idea of what my company was going to do with that acquisition before I handed my money over. And I’d like to be able to tell everybody publicly what that clear idea was so they could say “ah yes, I see what you’re doing now, that’s a good idea and well worth $26.2bn of Microsoft’s cash.” What I wouldn’t be doing is telling everybody that I was excited to see what we would “dream up” once the acquisition was complete.

Admittedly, Nadella does articulate some thoughts on what the acquisition could lead to. “How people find jobs, build skills, sell, market and get work done and ultimately find success requires a connected professional world,” he writes. “It requires a vibrant network that brings together a professional’s information in LinkedIn’s public network with the information in Office 365 and Dynamics.”

He envisions “new experiences”, for example, a LinkedIn newsfeed serving up articles based on the project a person is working on or Office “suggesting an expert to connect with via LinkedIn to help with a task you’re trying to complete”.

Nadella believes that as the experiences become “more intelligent and delightful, the LinkedIn and Office 365 engagement will grow. And in turn, new opportunities will be created for monetisation through individual and organisation subscriptions and targeted advertising”.

But the big question is whether LinkedIn is worth $26.2bn. Might there be cheaper ways for Microsoft to achieve its objectives? LinkedIn has 433 million registered users, generating sales of $3bn last year’ which works out at roughly $6.92 per user. But if you consider that a number of those users are paying $30 a month or more for their Premium membership, it suggests there are many members worth far less than $6.92. Microsoft is paying $60 per user.

Richard Windsor, analyst at Edison Investment Research, agrees the deal “is expensive”, but points out LinkedIn “has virtually 100% market share in what it does”. There is a “lot of value in the acquisition should Microsoft execute it properly”. But LinkedIn needs to be “seamlessly integrated with Microsoft’s other assets particularly Office and this is something that historically Microsoft has been very bad at”.

He adds that it could “take a very long time, if ever, before Microsoft could derive the real value from this acquisition and will give competitors like Slack more time to establish and build a presence”.

I can’t help wondering if someone in Microsoft could have dreamed up a simpler and cheaper way to do this.

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LinkedIn stock has lost about half its valuation under the stewardship of Jeff Weiner. MS chose to pay far more than the company was worth and, even worse, left the highly controversial CEO in place. Perhaps MS knows what it's doing; it doesn't seem that way to the outside world.