Microsoft Bets Big and We Are Buying

06/15/2016 7:00 am EST


Michael Berger

President & Founder,

Microsoft has seen its stock price continue to move lower after the company announced that its was buying out the largest professional network; Michael Berger, Associate Editor of highlights why he believes this was a smart acquisition and why he would be buying Microsoft at current levels.

Microsoft (MSFT) made an aggressive push into the cloud and internet services business when the company announced that it would acquire online professional network vendor LinkedIn (LNKD) for $196 per share in cash, or $26.2 billion equity value.

Expanding its Footprint

LinkedIn is a major Software-as-a-Service vendor with approximately 70% of its revenue coming from software related services. We expect this acquisition to not only be accretive but we also expect it to expand Microsoft's overall cloud and SaaS footprint.

Also, integrating Microsoft with LinkedIn's professional user data can provide strong competitive differentiation to Microsoft Dynamics customer relationship management (CRM) system from other application service providers.

LinkedIn can populate Microsoft Dynamics CRM with user profile information, enabling Microsoft customers to generate better sales leads with more complete information, particularly with Dynamics integrated with LinkedIn's SalesNavigator CRM.

A Synergistic Opportunity

Although many people have said that Microsoft paid a heavy premium to acquire LinkedIn, we see additional opportunities for synergy through operational and capital expenditure cost cutting initiatives specifically focused on data center consolidation.

Assuming Microsoft can migrate LinkedIn's network of in-house data centers to the Azure platform over time, there is significant opportunity for lower costs of goods sold on lower depreciation. If we assume a 50% reduction in data center footprint equates to a proportional reduction in depreciation, then MSFT will save around $485 million in depreciation expenses.

Although we previously were cautious with LinkedIn, we think this acquisition changes the company's potential. We believe that the revenue synergies, better sales execution under Microsoft, and movement beyond these transitional headwinds could bolster LinkedIn's long-term outlook.

Valuation is Attractive

The market has not responded favorably to this deal from Microsoft's standpoint. Its shares are down more than 4% since the deal was announced and MSFT is trading below $50.
Shares of Microsoft look very attractive following the recent weakness and we would use this opportunity to create or add to an existing position.

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