Shares of online business networking linchpin LinkedIn Corp (NYSE:LNKD) vaulted higher by nearly 50% during Monday early trading as the company has agreed to be acquired by Microsoft Corporation (NASDAQ:MSFT). The all cash deal, valued at about $26 billion, would have Mr. Softee paying $196 for each share of LNKD.
Despite the huge premium to Friday’s market close, the buyout offer is well below LinkedIn’s all-time high of $276/share.
Probably best known as the the business world’s Facebook, LinkedIn allows members to connect, network, and share business ideas with their inner circles. The company also provides value-add options for job seekers, business growth, lead generation, and position headhunting, amongst other things. According to its web site its premium services range anywhere from $30-$100 a month.
Value to Microsoft
Long considered a cash cow, Microsoft Corporation (NASDAQ:MSFT) maintains a 9 digit cash war chest, according to its latest balance sheet, and almost $14 billion more of receivables. However this would be a significant cash burn – almost a quarter of its cash. LinkedIn is profitable, but Microsoft’s buyout values the company at about 55X this year’s anticipating EPS.
Still, LinkedIn Corp (NYSE:LNKD) has been growing at an above 20 bottom line clip, but that hasn’t assured Microsoft shareholders of the merger synergy, with its stock down a couple dollars in Monday trading. Microsoft thinks the deal will prove accretive in about 2 years from close, however.
Adding LinkedIn would be another move by the company to continuing diversifying away from reliance on Windows and PC revenue. Over the years the company has bulked up in the gaming space through its Xbox platform and has made investments in enterprise applications and more recently cloud services. The company makes many granular acquisitions year-in, year-out.
But Microsoft’s success in large-scale acquisitions hasn’t been stellar, however, and LinkedIn would be far and away its largest — with no other purchase to date eclipsing the $10 billion mark. Skype and aQuantive are probably two of the more notable acquisitions that have fallen flat. Of course those were made during the reign of sometimes embattled CEO Steve Balmer.
Then there was the purchase of Nokia assets. I honestly can’t think of one person that I know that has ever owned a Lumia or Windows phone.
The company is now headed by Satya Nadella, whose arrival and performance to date has been mostly heralded, bringing needed tech vision and positively-regarded leadership to the company. He is betting a very big penny here however.
My first impression is that this is a bold move by the company into a space with momentum, but certainly longer-term speculative characteristics. Clearly this is a near-term windfall for LNKD shareholders, who’ve watched their stock bounce around like kettle corn over the past year.
To put the acquisition into some sort of granular perspective, each Microsoft shareholder is forking over about $3.29 a share for the privilege of owning LinkedIn Corp (NYSE:LNKD). The company has about $13.35 in cash/equivalents sitting on its March balance sheet. The stock itself sits at about $50. There’s about another $1.75 in receivables.
I can’t say I’m jumping up and down over the acquisition, but clearly LinkedIn has been gaining some traction with its model that Microsoft sees itself as being able to leverage. If Microsoft can transform LinkedIN into anything of the monster that Facebook has become in terms of John Q. Public usage, maybe I’ll start jumping up and down in time.
While the $26 billion price tag is only 1/10 of Facebook’s market price, it consumes a considerably much larger portion of Microsoft’s current war chest. I’d be remiss in not wondering if a special dividend or increased share buyback were more in order. Or even an acquisition structured as a stock swap.
As a Microsoft Corporation (NASDAQ:MSFT) shareholder, all I’ll say is that I hope Nadella’s vision and acquisition acumen does not prove as inept as Steve Balmer’s. That would likely make this an expensive mistake to say the least.
Adam Aloisi was long shares of MSFT at time of writing, but positions can change at any time.
Disclaimer: The above should not be considered or construed as individualized or specific investment advice. Do your own research and consult a professional, if necessary, before making investment decisions.