Evaluation of the Microsoft-LinkedIn Acquisition

Introduction

In June 2016, Microsoft Company announced purchasing the professional social network

LinkedIn for $26.2 billion in all-cash transactions, the biggest deal to be disclosed around that

period ever in the Tech industry, Griffith, 2016. Microsoft Corporation is among the most well-

known Technology companies. It is known for its Windows operating system, Office suite of

productivity software, Azure, and hardware products. LinkedIn Corporation is an online

professional network in the global domain. The company allows its members to create, manage,

and share their professional identity via its platform.

The merger was to serve growth and shareholder value for both companies. What that

meant was the purchase would integrate the LinkedIn network and its resources and scale into

Microsoft cloud services and productivity tools on the professional networking platform. The

deal would also give LinkedIn resources and scale to expand its offerings and global reach.

Company Backgrounds

Microsoft was founded in 1975 and is headquartered in Redmond, Washington. It

develops and licenses computer software, consumer electronics, personal computers, and

services. Its major product lines include the Microsoft Windows family of operating systems,

Office applications and other software, Windows Phone OS, Windows Internet Explorer web

browser, Xbox, Windows Azure, and other services. Of late, Microsoft has diversified to offer

cloud computing products with its Azure platform.

LinkedIn, headquartered in Sunnyvale, California, was founded in 2003. It is now the

world's biggest professional online network, with approximately 830 million members across the

world in 200 countries. Members use the platform to create profiles and connect with their
coworkers and other professional contacts, follow companies, learn different courses, and find

job opportunities. The company gains revenue through its recruitment solutions, sales navigator

tools, premium subscriptions, advertising, and online education services.

Financial Analysis

To evaluate the financial position of the two companies before the merger, their fiscal year 2015

financial statements were analyzed:

Microsoft Income Statement (FY, 2015) (Microsoft, 2015):

Revenue: $93.6 billion

Operating Income: $18.8 billion

Net Income: $12.2 billion

Microsoft Balance Sheet (FY, 2015) (Microsoft, 2015):

Total Assets: $176.1 billion

Total Liabilities: $83.1 billion

Total Equity: $93.0 billion

LinkedIn Income Statement (Q4 2015) (LinkedIn, 2015):

Revenue: $861 million

Operating Income: $78 million

Net Income: $3 million

LinkedIn Balance Sheet (Q4 2015) (LinkedIn, 2015):

Total Assets: $5.1 billion

Total Liabilities: $2.4 billion

Total Equity: $2.7 billion

The difference in these two financials indicates that Microsoft was the far bigger and more

profitable company, while LinkedIn was trailing in terms of revenue and net income, even as it

continued on its high-growth path. Still, at that time, LinkedIn had a valuation of over $16 billion

based mainly on assumptions for growth potential by investors (Griffith, 2016).

Risks and Mitigation Approaches

One major risk that Microsoft was facing had to do with overpayment, with the

acquisition's heavy price of $26.2 billion, thus valuing LinkedIn at over three times its market

cap (Griffith, 2016). This exposed the company to the potential destruction of shareholder value

if integration was mishandled or synergies projected were not achieved. In such a case, the

company was, therefore, working to manage this risk by having its various teams work on

conducting detailed due diligence and integration planning long in advance of the deal closing

(Warren, 2016).

Another key risk was the challenge of integrating the very different corporate cultures of

the traditional software company Microsoft and the younger, more dynamic LinkedIn (Spence,

2017). Mismanagement of this could yield the problem of talent retention and an exodus of key

LinkedIn personnel. Microsoft sought to forestall this through careful change management,

maintaining incentives for LinkedIn employees, and keeping the company as a separate

subsidiary capable of maintaining its unique culture (Weinberger, 2016).

The risks for product integration involve wrong decisions that could be taken on the

combination of two different platforms, apps, and services in a way that has created value for the

mutual customers. Microsoft threw teams at developing a long-term roadmap to realize synergies

across Microsoft's productivity apps, Dynamics CRM, Office 365 cloud services, and LinkedIn

network to avoid this (Butler, 2018).

 Finally, mismanagement of the human capital dimension can lead to value destruction.

Microsoft's key asset acquisition was LinkedIn's massive network of professionals. A massive

upheaval that results in a mass exodus of users would massively destroy the value of the

acquisition. Microsoft's approach was to maintain LinkedIn distinct and free from advertisements

but to add value through native integration of relevant Microsoft productivity tools.

Post-Acquisition Financial Policies

Post the acquisition in 2016, Microsoft focused on being in a good financial position and,

eventually, achieving an investment-grade credit rating for financing the next phase of

investment for growth. The company's capital structure was balanced with the right mix of debt

and equity, and the debt/equity ratio was around 0.5 as of 2018 (Microsoft, 2018). This was the

moderate use of leverage in keeping with the targeted capital structure ranges of Microsoft.

The company has also gone ahead to distribute dividends to shareholders amid spending in

growth engines such as cloud computing, LinkedIn, and security services. The prudence

approach to its business manages the enterprise risk management program. The program is

managed by the Board of Directors, who in turn identify the critical risks that emanate from

cybersecurity, legal compliance, and strategic investment, such as significant acquisitions.

Policies and plans for risk mitigation to evaluate and manage those key risks continuously.

While it, of course, enhanced the leverage somewhat, as in the borrowing for the

LinkedIn transaction, "Microsoft could still maintain an investment-grade credit rating, the

company's ample operating cash flows would go a long way to service the new debt" (Roose,

2017). So, in general, strong financial management at Microsoft and strict adherence to the set
financial policy gave them the flexibility to make investments in the future growth of the

business, the most recent example being the LinkedIn deal.

Findings and Recommendations

A closer look would reveal that the acquisition of LinkedIn by Microsoft at $26.2 billion, despite

some harrowing moments and challenges that were expected in the integration process, has been

viewed as successful.

Key Benefits for Microsoft.

Gained a valuable professional cloud-based network of over 830 million members as of 2022

(LinkedIn, 2022).

Integrated Microsoft 365 apps like Word, PowerPoint, and Teams directly into the LinkedIn

workflow (Butler, 2018).

Microsoft's position in the quickly growing field of professional social networking was

strengthened. Accelerated Microsoft's move to the cloud and to a recurring revenue model for

businesses.

Key Benefits of LinkedIn.

Gained resources, AI capabilities, cybersecurity, and global distribution from Microsoft

Enhanced platform scalability, performance, and analytics through Microsoft's cloud

infrastructure

Integrated Microsoft services like Advertising, streaming video, and code repositories into

LinkedIn (Butler, 2018)

Doubled revenue from $3 billion in 2015 to over $6.8 billion by 2020 (LinkedIn Q2 2020

Earnings)
 Though the acquisition did not fully achieve its targets of $3+ billion in annual revenue

from LinkedIn by 2018, the professional network continued to grow globally, still driving new,

recurring cloud revenue streams for Microsoft's Productivity and Business Processes segment

(Microsoft Q2 2022 Earnings). And sure, such investment has paid off, as over the recent years,

Microsoft has been able to sustain significant shareholder returns and growth in profit.

Some key recommendations for Microsoft going forward

Accelerate the integration of the LinkedIn professional graph with Microsoft enterprise cloud

services, AI solutions, and modern workplace applications.

Tap into the LinkedIn platform and community to drive the accelerated growth of adjacent

services such as online learning, talent solutions, marketing solutions, creator tools, and gig

economy services.

Preserve the differentiated ad-free user experience that LinkedIn offers today without reducing

its cost efficiencies by Microsoft shared technology services.

Scan the horizon of opportunities for LinkedIn to advance the reach of Microsoft in new

geographies internationally, more especially in emerging economies.

Use LinkedIn's platform to enhance customer analytics, talent acquisition, and workplace

analytics by using data-driven insights.

In this regard, it is meant to continue to focus on achieving sustainable strategic synergies that

combine LinkedIn's professional cloud platform with Microsoft's enterprise technology offerings

and distribution capabilities at a broad scale.

 References.

Butler, M. (2018, March 8). Here’s how Microsoft will integrate LinkedIn into its products.

https://www.linkedin.com/pulse/heres-how-microsoft-integrate-linkedin-its-products-

martin-butler

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