On June 13, 2016, three big brothers got together and spun the roulette. The Microsoft house took the gamble, and the LinkedIn players got their huge payout. Microsoft's CEO Satya Nadella, LinkedIn's CEO Jeff Weiner, and LinkedIn's Co-founder Reid Hoffman announced $26.2B cash LinkedIn acquisition. What is the financial impact for both of the companies? MSFT is trading at $50.14 (-2.60%) and still slowly dropping while LKND surged to $192.21 (+46.64%) and is still slowly rising. LinkedIn stockholders are having a field day and here's an interactive graph of it. This is a big win for LinkedIn, and I applaud them for getting acquired. Who in the world would think something like this would be possible for a small startup found late 2002 to grow into a tech giant and eventually be devoured by a bigger tech giant?
There is a good rule of thumb to company valuation in the finance world; it's the times revenue valuation method. Multipliers on average tend to range from three to seven of the yearly revenue where ten is exceptional. Before the acquisition, LinkedIn enjoyed a multiplier of 7.607 on the NYSE with solid 34 percent year over year revenue growth. Microsoft-LinkedIn deal is 8.759 times the $2.991B total revenue of LinkedIn in 2015! That is unquestionably quite the achievement for LinkedIn and a big premium for Microsoft. Here's what Microsoft bought:
LinkedIn most valuable product is the users, "our" data, and the fact that we come on this platform to update "our" profiles. What Microsoft bought is "us" and when the acquisition is going to be done by the end of the year, we will all join hands in the Microsoft Dynamics database.
There are 433 million LinkedIn users and 2 million paid users. That's 4.6 percentile conversion rate of free versus premium which essentially makes any new users equal free users. Everyone who registers is worth about sixty bucks and some change. Everyone who pays a couple of bucks to LinkedIn is worth thousands. Microsoft paid $60.50 for each user or $13,100 for each paid user. Here's something that you might not know about how good of a deal this is for LinkedIn. Microsoft bought all the inactive, outdated, and fake users which amount to about 86.6 million profiles (twenty percent of 433M) as well as the 70.43 percent of users outside of US. Talk about inequality and the economics of abundance and creating value out of thin air. It's miraculous, and it happened at LinkedIn!
Microsoft + LinkedIn "The Professional World."
Two possible scenarios of what will happen to LinkedIn:
LinkedIn lunges in the stardom of professionals and productivity everywhere. This deal could be the next Microsoft-Minecraft that exponentially lunges an already viral game into the gaming stardom and special-ed classrooms (a very cool and honorable project). However, the founder of Minecraft, Markus "Notch" Persson regrets the decision to sell Minecraft to Microsoft quoting "Hanging out in Ibiza with a bunch of friends and partying with famous people, able to do whatever I want, and I've never felt more isolated" (CNET).
Scenario two: Microsoft ruins LinkedIn, and this acquisition is the next in line Microsoft-Nokia kind of a deal. It's more like four times the Nokia deal. Here's the problem with Nokia today, you might have heard or know or even owned a Nokia phone in the past, I did, but you surely don't anymore. Now it's all about the Windows Phone whose market share fell below one percent. To be fair to Microsoft, Nokia wasn't doing exactly great before the acquisition. Was LinkedIn doing well before the acquisition?
LinkedIn Crash on 02/05/2016
It's hard to say what is going to happen, or is it? I am going to say what both Microsoft and LinkedIn won't say. The acquisition is a company-wide $26.2B golden parachute. LinkedIn stock plunged to $108.38 (-43.63%) only 4 months ago. Since then, LinkedIn only recovered to 68 percent of the pre-fall glory. LinkedIn generates $1495.50 per year per paying user and $46,400 per corporate customer (Trefis). There are about 43,000 Talent Solutions Corporate Recruiter seats powering over 65 percent of LinkedIn revenue in Q3 of 2015 (Forbes). The majority of LinkedIn's revenue is paid for by enterprises like the ones in direct competition with Microsoft. I can only imagine if our competition owned the database for our hiring. Things are going to change as companies are going to move away from LinkedIn to find talent elsewhere.
Beyond public information, my friends at LinkedIn told me about massive lays off where the Director of Engineering of Mobile was fired because the LinkedIn app earned 1-star rating across the board triggering a chain reaction of hundreds of top engineers quitting their jobs as people are leaving the company. Internal reports say that only 3.5 million IT professionals on the LinkedIn network are active beyond the average user. LinkedIn struggles with internal and product design challenges and big ones at that. To be fair to LinkedIn, their numbers are still very impressive. Growth rates tend to decrease as volume goes up, for example, first world GDP growth vs. the emerging economies GDP growth rates. Engineers tend to leave when stock plummet and people get fired when things go wrong. Microsoft acquisition is the saving grace for LinkedIn product and its early stage employees (Quora).
This acquisition is less about LinkedIn and more about the growth potential for Microsoft. Financials indicate a steep acquisition premium which makes this move a pretty controversial one from Microsoft. Of course, there is potential on both sides to do some good, but there is also a lot of potentials to do a lot of bad.
Despite LinkedIn's revenue growth stalling since Q1 of 2013 indicating a negative acceleration (Bloomberg), let's assume a steady revenue growth of 34 percent year over year for LinkedIn. Running the numbers with logarithmic compound interest, we find that the break-even point for Microsoft's investment is seven years and 142 days away. The real break-even point is more likely to be a decade away.
This acquisition is not a bad acquisition for Microsoft, although, the money in LinkedIn stock might never see the light of profit unless Microsoft pours all of its resources, namely the 1.2B office users, behind LinkedIn to help it grow or finds a buyer to hand over the ball. Microsoft is onto something. Strategically this acquisition accomplished for Microsoft what they failed to accomplish last year. Microsoft tried to acquire Salesforce and its database and customers for $55 billion, but Marc Benioff the CEO of Salesforce countered the offer with $70 billion and effectively outpriced Microsoft (Business Insider). Now the pressure is on Salesforce as well as Google and Facebook and all the other tech giants to respond to this very strategic move by Microsoft. Will Goole or maybe Apple acquire Salesforce?
LinkedIn Revenue Growth
Why did Microsoft buy LinkedIn? Three simple reasons:
There's a clear mutual benefit. LinkedIn needed to be acquired. Otherwise, it would have died. Microsoft is reinventing itself as a business services company and needed a social network to compete with Google for Work and potentially any professional features on Google Plus.
Location, location, location. Microsoft is a not so hot Seattle tech giant who wants to break into the Silicon Valley to compete on a level field with Google, Facebook, Cisco, and Salesforce. LinkedIn, on the other hand, is a hot tech giant located right next to Google in Mountain View and San Francisco, CA. There are natural relationships, intermingling, ideas being shared between people from Google, Intuit, and LinkedIn at Sports Page, the unofficial spot where everyone hangs out after work, which LinkedIn is about to buy for its new parent company.
Technology war. More on that after a commercial break by the two CEOs who made this deal happen.
LinkedIn-Google Mountain View, CA Location
Going forward, I am excited to see where these two about to become one super giant take us with their product, innovation, and hopefully working solutions. Take it from the two CEOs who made this deal possible:
Nadella, the CEO of Microsoft, said: “Together we can accelerate the growth of LinkedIn, as well as Microsoft Office 365 and Dynamics as we seek to empower every person and organization on the planet.”
Jef Weiner, CEO of LinkedIn, recently discussed some of the synergies between Microsoft and LinkedIn and the future changes to LinkedIn platform in his article:
Microsoft-LinkedIn Acquisition Presentation
I like LinkedIn. I do. It allows me to connect with people I wouldn't have otherwise and do my job better. I have even written a piece on how to recruit on LinkedIn. However, there is something unsettling about what is happening post-acquisition. Shortly after LinkedIn Microsoft acquired Wand Labs, a messaging AI startup, "to add more natural language tech to messaging apps and bots" (TechCrunch) and the "World's Most Connected People Have Disappeared From LinkedIn" (Inc.com) published by Candice Galek, Founder of Bikini Luxe, wrote: "What I have found is that this could happen to anyone, for any reason. What we are led to believe to be our virtual property is not ours at all, and it can be taken away at any time". Suddenly, something sank in...
This is a lot bigger than LinkedIn. Welcome to the search engine wars. Microsoft gave away Windows 10 for free which is a clear big-brother move because of its shiny new feature Cortana that monitors your every activity. Microsoft bought LinkedIn to give it's Artificial Intelligence a constant and a massive stream of live data on which it can feast and grow on. This is the real reason behind the acquisition -- to compete with Google Assistant, Amazon's Alexa, Apple's Siri, Viv and all the other AI (Fortune). It's to teach the Cortana AI why, how, and when a professional makes a buying, hiring, or any other business decision, and then augment Bing, Dynamics, and all other Microsoft products with this AI just like Google embedded BrainRank in its Search (Bloomberg). Microsoft is creating a powerful intent discovery engine based on all the messaging interactions between professionals on LinkedIn. Google, Baidu, Yahoo, Apple, IBM, and Microsoft, all these biggest players in Tech today have a single most important competing arena, and that is Artificial Intelligence. Welcome to the beginnings of SkyNet ladies and gentleman! This stuff is happening.
Microsoft Artificial Intelligence - Cortana
The recruiting industry is indeed waiting for the big great unveil which will come. If Microsoft plays the LinkedIn card well, they could make a super recruiter platform that integrates better LinkedIn-Bing Boolean search, save LinkedIn groups with Yammer, integrate Skype for real-time candidate outreach, Outlook/Exchange calendar scheduling as well as Excel or Dynamics CRM/ATS system. Of course, any of these integrations would take years just building the architecture for integration and serious commitment to accomplish given the speed of innovation of these giants. It would be truly LinkedIn version 2.0 for recruiting and perhaps a lot of recruiters might like it. AI powered by deep learning and quantum computing is pushing the boundaries of innovation, perhaps sooner or later Microsoft's Cortana will be our best recruiting assistant.
Microsoft is playing a huge gamble where LinkedIn got the big payout, but the odds are always with the house. For the Xbox and PC gamers out there, Microsoft pulled the console out and typed "allyourbasearebelongtous" and won the game and its achievement is published on its Microsoft-LinkedIn company page. Imagine the risk. Imagine the possibilities.
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This article was originally published here.
Ninh Tran, CMO at Hiretual, a Recruiting Power Tool made by Recruiters for Recruiters.