Microsoft (NYSE: MSFT) put itself back on the media radar by buying LinkedIn (NYSE: LNKD) for $26.2 billion (€23.17 billion) in cash. The deal is certainly newsworthy but it might not add much value to the software giant.
Despite its high stock price; $190.99 (€176.83) on June 20, 2016, the financial numbers indicate that LinkedIn is losing a lot of money. The company reported a negative income of -$169.42 million (-€149.8 million) on March 31, 2016.
LinkedIn has actually been operating at a loss for over two years. It first reported a negative net income of -$9.29 million (-€8.21 million) in March 2014; that number has grown steadily ever since.
That number shows us that instead of a bold move by Microsoft, LinkedIn’s sale might be a desperate bid to save the company from a death spiral. Some of LinkedIn’s other numbers; such as a profit margin of -5.32% and a diluted earnings per share number of -1.3, point in that direction.
Is LinkedIn a Good Deal for Microsoft?
Despite that there are some positive numbers at LinkedIn; that indicate it might add value to Microsoft. LinkedIn reported a free cash flow of $34.28 million (€30.31 million), $3.16 billion (€2.79 billion) in cash and short-term investments, $51.2 million in cash from financing and $894.03 million (€790.48 million) in cash from operations on March 31, 2016.
That indicates the company generates some cash, which means it might be profitable with a different business plan. Adding plausibility is LinkedIn’s revenue growth in recent years.
The social network’s revenue grew by $223 million (€197.17 million) in first quarter 2016; rising from $2.991 billion (€2.364 billion) in December 2015 to $3.214 billion (€2.84 billion) in March 2016. LinkedIn’s revenues grew by $831 million between March 2015 and March 2016; rising from $2.383 billion (€2.11 billion) to $3.214 billion (€2.84 billion).
This indicates that LinkedIn might add some cash to Microsoft’s bottom line. It also shows us that LinkedIn might be capable of profitable operation as part of a larger organization such as Microsoft.
Will LinkedIn Help Microsoft expand its Social Media Presence?
Despite the financial numbers the biggest argument for the Microsoft-LinkedIn deal is the potential for expanding the software goliath’s social media presence.
That argument is rather flimsy because LinkedIn is not that big a social media player. Data provided by Statista, indicates that LinkedIn had just 100 million users in April 2016. The largest social network; Facebook (NASDAQ: FB) had 1.59 billion users during the same period.
LinkedIn is just one fourth the size of Facebook’s smallest social media solution; Instagram. Statista estimated that Instagram had 400 million users in April 2016. It is just one tenth the size of Facebook’s largest solution WhatsApp; which had one billion users, and one ninth the size of Facebook Messenger – which 900 million users.
The LinkedIn acquisition will give Microsoft around 400 million users when LinkedIn’s users are added to Skype. Note: since many LinkedIn users also Skype, the real number is probably much lower.
At the end of the day, Microsoft spent $26.2 (€23.17 billion) billion to get just 100 million users. Skeptics will wonder if Microsoft just paid too much for a very sick company that has limited social-media reach. The deal seems to be the opposite of Facebook’s $19 billion (€16.8 billion) acquisition of WhatsApp in 2014, Microsoft just paid $26.2 billion for a niche player
What is Microsoft Getting for its $26.2 Billion?
The argument for the LinkedIn deal is that the niche where it operates; is a potentially profitable one. Statista reported that 41% of American LinkedIn users made more than $75,000 (€66,313) a year in 2015. The average annual individual income in the United States in 2015 was $50,756 (€44,877.1), according to the US Census.
That means Microsoft might have purchased a distribution channel for its products. Many LinkedIn users are presumably entrepreneurs, executives and other decision makers that presumably purchase software for their organizations.
Microsoft CEO Satya Nadella seemed to confirm this by telling The New York Times that the deal brings together the professional cloud and the professional network. Nadella might be planning to use LinkedIn as a gateway to Microsoft’s cloud-computing services. One has to wonder if the social network’s users will accept that.
Could Microsoft have got a Better Deal Elsewhere?
Cynics will charge that Microsoft did not get the kind of mass social media presence it needs to stay relevant. They will also note that it might have picked up other services with more users for less.
This includes Twitter which had 320 million users in April 2016; and a market capitalization of $11.57 billion (€10.23 billion) on June 20, 2016. There is also Yahoo (NASDAQ: YHOO) asset Tumblr which had 555 million users. Not to mention such privately held offerings as Vibe with 249 million users; Snapchat with 200 million users, and Telegram with 100 million.
It looks as if Microsoft might have overpaid for a social network with very limited reach. Despite that the deal is not a bad one for Microsoft which had $105.55 billion (€93.32 billion) in cash and short-term investments on March 31, 2016, according to ycharts.
That leaves Microsoft with $79.35 billion (€70.16 billion) in the bank; more than enough to buy up Twitter, Viber, Telegram, Tumblr, Instagram or any other social media it wants. One has to wonder if LinkedIn is simply one of a number of social media acquisitions; Nadella has planned.
Additional acquisitions will be necessary if Microsoft is serious about social media. If it is not, LinkedIn might become a major waste of money.