What The Microsoft LinkedIn Acquisition Means For Investors

  • Microsoft is buying LinkedIn for $26.2 billion, a $48/share premium to LinkedIn's previous close.
  • LinkedIn needed capital to face Facebook, and Microsoft needed a social play.
  • The deal still values LinkedIn below what it was priced a year ago.

Microsoft's (NSDQ:MSFT) decision to buy LinkedIn (NYSE:LNKD) for $26.2 billion will create a big sigh of relief at the acquired headquarters, and transform the acquirer. It is the largest acquisition Microsoft has ever made.

Microsoft is finally getting the social platform it has sought to build for years, as LinkedIn has become the world's top professional network and a dominant force in acquiring help. LinkedIn, meanwhile, got out of what had been a terrible place to be, short of capital and facing the might of Facebook (NSDQ:FB) in its cloud-social niche.

Now, with Microsoft's cloud and capital behind it, LinkedIn has a chance to face Facebook on equal terms. Alphabet Inc-A (NSDQ:GOOGL) is also under pressure, now, to make its own acquisitions. Online life just got a lot more interesting.

In a press handout, Microsoft emphasized the cross-sale opportunities between LinkedIn content and Microsoft applications.

LinkedIn has 433 million active users, Microsoft Office has 1.2 billion active users. The plan is to integrate LinkedIn professional profiles and newsfeeds into Office so that they are always available. Cortana, Microsoft's voice assistant, will be able to introduce people based on points of connection. Microsoft's Customer Relationship Management tools will be connected to LinkedIn profiles to help close sales. Skype calls will become available to LinkedIn users.

Microsoft has chosen to buy LinkedIn with new debt, so it does not expect the deal to be accretive to earnings until 2018. The fact it is using debt could cut Microsoft's credit rating. LinkedIn CEO Jeff Weiner said his company will remain in Silicon Valley, operating as a fully independent entity within Microsoft.

Initial reaction to the deal was negative, with Microsoft shares falling about 2%, but they recovered a bit as the day went on, even while the market as a whole was falling. Facebook (NSDQ:FB), considered the target of the deal, fell 2.3% on Monday, and began trade Tuesday at $113.70. Shares in Twitter (NYSE:TWTR) rose 3.8% on speculation it could be bought next.

LinkedIn, of course, zoomed 46%, right to the deal's target price. The price is well below its $250 highs but well above the price it fell to after fourth quarter earnings disappointed.

Microsoft had tried social networking before, buying Yammer for $1.2 billion in 2012 and integrating it with its Sharepoint file sharing software. It tried to turn Yammer into an internal social network for corporate customers. The plan, this time, is to integrate LinkedIn fully with its cloud services, Office applications and Windows operating system, growing the LinkedIn user base organically.

The deal should be seen as the centerpiece of Microsoft CEO Satya Nadella's "cloud services and software" strategy. The company has been investing heavily in its Azure cloud, which competes directly with Amazon Web Services (AWS), and LinkedIn will provide traffic to that cloud.

If it can make Microsoft software a standard for LinkedIn users, and make LinkedIn a standard for Office users, this deal could be a home run. But Microsoft has also taken on risk with this deal. Investors will see more volatility in Microsoft shares, and those who are risk-averse may want to move their money elsewhere.

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