Was LinkedIn for Sale All Along?

Out of the blue, LinkedIn made itself available for sale.  Microsoft reached out.

Did anybody see it coming?

Did anybody know Microsoft had its eyes set on acquiring LinkedIn? Yes, this is the LinkedIn almost all professionals are familiar with, the website that presides over business networking, permits its hundreds of millions of users to post their resumes' online, and is a gateway for corporate recruiters to sift through data on those who work in the most junior positions to those who have roles on a floor C-Suite.

There hadn't been rumors floating around about LinkedIn searching for a suitor or buyer. Not much whispering about its board members adopting a strategy to convince shareholders the company would benefit from a merger. The merger announcement, on a late-spring Monday morning, emerged from around the bend.

Microsoft has announced it plans to acquire LinkedIn for $26 billion.  The acquired company, after another year of losses when it had actually turned the corner toward profitability two years ago, had decided that its best bet was a merger. 

Too much risk and uncertainty loomed if it opted to push ahead, find clever ways to boost sales, and figure out a way to generate predictable streams of income (which it hasn't yet done). Too much uncertainty loomed if it thought its current business model, strategy and financial results could thrust the company to valuation levels (above $100 billion) that could reach the class of Facebooks or Googles.

Might there have been clues the past few months that LinkedIn had put itself up for sale?

A few clues.  Last year's performance. This year's first-quarter outlook and performance.  And the implosion in its stock price in February when an unfavorable outlook presented by the company led to a decline by almost 50%.

Had the board decided that the company's valuation, as an independent company, right now was as high as it could possibly get?

Unlike some ventures in Silicon Valley that were launched in the late 1990's and early 2000's and that eventually went public, LinkedIn had begun to eke out small profits or at least get near break-even. But the company last year sagged and reported losses. 

Revenues were growing at rates Silicon Valley followers covet. The company now boasts of sales of almost $3 billion, about three times revenues from three years ago.  New users, new services, and more interesting and useful items that cascade through its version of a newsfeed helped to generate more fees and advertising revenue. 

But expenses across the board surged. The more it has grown, the more it has spent to spur growth or find ways to make LinkedIn special in complex sphere of social and business networks.  Revenues show signs of flattening out, and the company was on a pace to lose about $250-300 million this year.

The balance sheet has a modest amount of debt (about $1 billion), and the operations actually squeeze out some cash flow, despite recent losses. Much of that cash flow has been siphoned toward new investments and capital expenditures. 

In other words, as a relative new company in a technology arena, the company was doing what it thought it's supposed to do to grow and remain relevant, interesting, and hip. Like many new Bay Area companies, it hasn't even thought of paying dividends yet.

With revenues apparently topping out, with it perhaps having run out of ideas for how to push usage on the site and with stock values gyrating in sometimes unexplained ways, LinkedIn figured its best bet was a sale.

So now the ball is in Microsoft's court. How does LinkedIn fit in? What will it do to or for the company? How realistic are the reported synergies between Microsoft's strengths and LinkedIn's purpose?

Despite some equity analysts and market watchers squirming after the announcement, Microsoft has the heft and might to do the merger.  Its market value exceeds LinkedIn's by 10-times. LinkedIn's sales will contribute, at least for now, less than 3 percent of the combined company. Despite some who lament Microsoft being an old-school, behind-the-times technology company, it still can still be counted on to generate over $10 billion in profits (and over $20 billion in operating cash flow). Like Apple, it has over $50 billion of cash sitting on the balance sheet waiting to prey on a new investment opportunity. (It's those kinds of cash-flow numbers that permit credit-rating agencies to rate it AAA.)

LinkedIn, therefore, would only cause a slight scratch in Microsoft's numbers, if the merger fails.  Somehow, however, critics and pundits might be right in wondering how the two fit together. Will professionals using Excel spreadsheets really seek advice or input from their connections in LinkedIn?

Tracy Williams

See also:

CFN:  Who Calls the Shots in Silicon Valley? 2016
CFN: Twitter's Turn for an IPO, 2013
CFN: Why Did Dell Opt to Go Private? 2013
CFN:  Google Reorganizes as Alphabet, 2015