Microsoft Links up with LinkedIn

08/22/2016 7:00 am EST

Focus: STOCKS

Genia Turanova

Editor, Leeb Income Performance

In June, this featured recommendation – a giant software firm -- announced its biggest acquisition to date, notes Genia Turanova, editor of Leeb Income Performance Report.

Microsoft (MSFT) will buy social-networking company LinkedIn (LNKD). The deal is all-cash; it values LinkedIn at $26.6 billion as Microsoft offered a nearly 50 percent premium to the previous day’s closing price.

Still, we don’t think Microsoft is paying too much. In the fourth quarter of fiscal 2015, online advertising revenues for LinkedIn grew by 20 percent.

This was a significant loss of pace compared to its numbers from earlier quarters (and caused the shares to plunge) — but Microsoft, with its mature business, could only dream of this kind of growth.

And LinkedIn is dominant in its niche: it represents the world’s largest professional social network, with 433 million active users, and it assesses its addressable market at $115 billion.

The deal also assumes that LinkedIn will remain a stand-alone entity, and its CEO Jeff Weiner will remain at the helm (while reporting to Satya Nadella).

LinkedIn might be exactly what Microsoft needs now: a professional social media network that could be leveraged to Microsoft’s major strengths.

For instance, the combined company would have significant leverage to the cloud. Further, LinkedIn growth could potentially accelerate as the two companies use Microsoft’s vast customer base.

Microsoft Office 365 has also been named as a strong potential beneficiary from this acquisition.

Much of the future synergies, however, are expected to result from the combination of LinkedIn Sales Navigator and Microsoft Dynamic CRM (i.e. customer relationship manager).

Of course, as with any acquisition, significant potential exists for pitfalls to develop. The businesses from such different sides of tech might be difficult to combine; synergies might fail to materialize, and the price might ultimately prove too expensive if LinkedIn revenue growth slows significantly.

Still, we think that positives outweigh the risks, and view the deal as favorable — and possibly game-changing for the future of Microsoft.

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By Genia Turanova, Editor of Leeb Income Performance Report

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