The acquisition of LinkedIn by Microsoft for a whopping $26.2 billion marks a new and more aggressive phase of Satya Nadella's stewardship of the Redmond-headquartered technology company. Although there are existing as well as potential synergies between the two businesses, the key commonality is really that they both target the same audience of white-collar professionals. Microsoft enables the professional white-collar individuals to work, through the medium of its office software suites, usually on a machine run by its operating system; LinkedIn helps the same professionals to find better avenues of employment, and also to network with other professionals.
Microsoft is increasingly moving to the web and to cloud-based services, with its concept of Office365, Skype, Cortana and Dynamics (a suite of business management tools) and its focus on delivery of software as a service. It is the world's second-largest cloud services player behind Amazon. Although Microsoft's foray into mobile, including its $7.9 billion acquisition of Nokia's phone business, has not been very successful, it continues to try and build a strong mobile presence including the rollout of a new operating system, Windows10.
LinkedIn is, of course, entirely internet-based. The company pioneered the concept of a "professional social network", when it was launched in 2002. The B2B network is absolutely dominant in its space and it has around 433 million members. It is a mandatory port of call, when human resources departments are looking to recruit people with specific skills and experiences. It is also a standard operating procedure across most industries to check LinkedIn profiles before entering business meetings with strangers. Unusually for a web-based play, LinkedIn is profitable with operating profits (Ebitda) of $266 million on 2015 revenues of $3.2 billion. It would be accounted profitable at the net level too (it had net losses of $169 million), if the impact of its stock option plan for employees is ignored. Microsoft is, of course, paying a large premium to the recent valuations. The offer of $196 per share is 50 per cent more than last Friday's trading price of $131. Interestingly, Microsoft intends to borrow the money for the deal (admittedly at a very low interest rate) even though it has over $100 billion in cash on its balance sheet.
There is no doubt that the merger creates a massive storehouse of data in the domain of human resources. Microsoft already knows the calendars and appointment schedules (Outlook) of many office workers. It has access to their official mails and to the documents they create. It has a powerful, popular digital personal assistant (Cortana). LinkedIn has data about skills, employment records, organisational structures of various companies, professional networks and job-mobility trends. How all this is to be integrated and monetised remains the challenge. Microsoft is betting $26 billion that this can be done successfully and profitably.