MSFT – LNKD: Expanding the Economic Graph

Microsoft ($MSFT) put in a $26.2 billion cash bid for professional social networking company LinkedIn ($LNKD) yesterday.  The deal is the largest transaction of the Satya Nadella era and represents a fifty percent premium over LinkedIn’s Friday closing price. The deal provides Microsoft an entrée into professional social networking, enterprise recruiting, and learning and development (Lynda.com).  The deal also brings LinkedIn Sales Navigator into Microsoft’s enterprise product line.

Microsoft benefited from a dip in LinkedIn’s stock price earlier this year when the firm provided soft guidance for fiscal year 2016.  Although the stock has rebounded some following a recent strong earnings report, the bid is below LinkedIn’s stock price at the beginning of the year.

The deal is expected to close later this year.  Both boards have already approved the offer.  Regulatory approval is required in the US, EU, Canada, and Brazil with the firm “confident” in approval.

LinkedIn Chairman Reid Hoffman called the transaction a “re-founding moment” for LinkedIn, which went public in May 2011.

Merger Plans

Jeff Wiener will continue as the CEO of LinkedIn with no changes in the firm’s organizational structure.  He will report directly to Nadella.  LinkedIn will continue as an independent brand and product line but will move to integrate the social network and its products with Microsoft Office and Dynamics.  Nadella is looking to accelerate LinkedIn’s growth rate while “partnering on product integration plans with the Office 365 and Dynamics teams.”

LinkedIn will be rolled into Microsoft’s productivity and business processes segment, which includes Office and Office 365.

One of the merger’s goals is to provide “a professional’s profile everywhere.”  Microsoft noted that professional data is scattered in disparate silos which are often outdated and incomplete, but that “in the future, a professional’s profile will be unified and the right data at the right time will surface in an app, whether Outlook, Skype, Office, or elsewhere.”

“Now you have the ability whenever you’re looking up a contact not only to see that contact with the information that’s contained in active directory, but you can get at the full richness of their information in the professional network and who are all the others in their professional network, so that is sort of what we mean by the social fabric of your digital work and Office 365,” said Nadella.

Microsoft is also looking to leverage LinkedIn’s newsfeed service which they built upon the Newsle and Pulse acquisitions.  Microsoft told investors that “since information lives in silos, professionals miss relevant news and waste time.  In the future, the newsfeed will be the place to go for every professional to stay connected with the happenings in their network, industry, and profession.  Beyond all this, the feed will be constantly informed and tailored to the happenings at work like the meeting coming up and projects underway.”

The intelligent newsfeed will increase membership, monthly active users, and ad revenue.

Likewise, Microsoft anticipates an improved digital assistant as Cortana leverages LinkedIn professional and news intelligence.  “Just imagine you’re walking into a meeting and Cortana now wakes up and tells you about the people you’re meeting for the first time, but tells you all the things that you want to know before walking in and meeting someone, because you have the access to the professional network. Cortana is about knowing everything about you, your organization, the work and now the professional network,” said Nadella.  “So really being able to reason about all of that and be your personal digital assistant, that’s truly the best professional digital assistance is a fantastic opportunity.”

Microsoft Dynamics sales reps will benefit from a direct connection with LinkedIn Sales Navigator allowing them to engage in social selling.  The firm told investors, “this will transform the sales cycle with actionable insights and the ability for each seller to build deeper relationships with prospects and customers – all to accelerate results.”

Other end user benefits include improved “organizational insights and transformation” via LinkedIn Recruiter and “just in time social learning” via Lynda.

Nadella told Microsoft employees that the merger expands market opportunities for Microsoft:

We are in pursuit of a common mission centered on empowering people and organizations. Along with the new growth in our Office 365 commercial and Dynamics businesses this deal is key to our bold ambition to reinvent productivity and business processes. Think about it: How people find jobs, build skills, sell, market and get work done and ultimately find success requires a connected professional world. It requires a vibrant network that brings together a professional’s information in LinkedIn’s public network with the information in Office 365 and Dynamics…As these experiences get more intelligent and delightful, the LinkedIn and Office 365 engagement will grow. And in turn, new opportunities will be created for monetization through individual and organization subscriptions and targeted advertising.

The merger will make business professionals more productive while “reinventing selling, marketing and talent management business processes.”

The Economic Graph

Microsoft published the following summary of “The Professional World” covered by Microsoft and LinkedIn:

Product counts from the Microsoft - LinkedIn Acquisition Fair Disclosure presentation on June 13, 2016.
Product counts from the Microsoft – LinkedIn Acquisition Fair Disclosure presentation on June 13, 2016.

Microsoft sees the acquisition as an opportunity to merge the Microsoft and LinkedIn Graphs.  In a presentation to the market, Microsoft stated that “today, all the information a professional needs to be successful lives in silos.  By connecting the world’s leading professional cloud and the professional network, we can create more connected, intelligent and productive experiences.  We also have the opportunity to accelerate the realization of the Economic Graph.”

The Economic Graph is LinkedIn’s BHAG (Big, Hairy, Audacious Goal). A good BHAG should be viewed as internally achievable even if others view it as simply fanciful. Furthermore, a good BHAG provides a long-term vision and mission for framing business decisions and motivating employees.

In March 2015, Weiner said that the Economic Graph’s goal is to “create economic opportunity for every member of the global workforce” of over 3 billion people and 780 million “professionals, knowledge workers and students” by capturing broad economic information including employees, companies, universities, jobs, skills, etc.

Merging the Microsoft and LinkedIn graphs to advance the Economic Graph (Slide from Fair Disclosure call on June 13, 2016).
Merging the Microsoft and LinkedIn graphs to advance the Economic Graph. (Slide from Fair Disclosure call on June 13, 2016).

Other elements of the graph include a “profile for every company in the world”. Weiner sized this at 60 million to 70 million companies “if you include small and medium-size businesses.”

Beyond people and companies, the economic graph would “be a digital representation of every job available in the world — that would be full-time, temporary, for profit and volunteer” along with “a digital representation for every skill required to obtain one of those jobs offered by one of those companies.”

“When you combine Microsoft’s corporate graph with LinkedIn’s professional graph we think we’re going to be able to take a very substantial leap forward in terms of the realization of our vision, which is creating economic opportunity for every member of the global workforce, and we’re going to do that through the development of the world’s first economic graph,” said Weiner.  “Just as we have changed the way the world connects to opportunity, this relationship with Microsoft, and the combination of their cloud and LinkedIn’s network, now gives us a chance to also change the way the world works,” Weiner said. “For the last 13 years, we’ve been uniquely positioned to connect professionals to make them more productive and successful, and I’m looking forward to leading our team through the next chapter of our story.”

Analyst Perspective

“Based on the income statement and balance sheet, the numbers look high for an acquisition,” Patrick Moorhead of Moor Insight and Strategy said. “I see the potential for a beefed up business social media service which is more than a resume posting service as it is today. I can envision a service where businesses more freely collaborate, leveraging online versions of Office 365, Skype for business and OneDrive.”

Mark Vickery of D.M. Martins Research views the transaction as one that wraps sales and recruiting professionals within the Microsoft-LinkedIn product universe:

At an individual level, it starts with pre-professional networking and the job search, areas in which LinkedIn has been dominant as the leading professional network platform for a while now. But then it continues with professional development, through LinkedIn’s Lynda and, most importantly, with the integration of productivity tools, including Microsoft’s Office, SharePoint and Skype. A sales representative at Company XYZ, for example, who originally found his or her job through LinkedIn, could not only generate sales leads through the same platform, but also manage calendar (MS Office), meetings (Skype), and share documents (SharePoint) more seamlessly, provided that the many tools are properly integrated, without ever having to leave the Microsoft umbrella of products and services – all with a single sign on. In the end, the hypothetical salesperson could very well have an all-Microsoft experience in the office, from 9 a.m. to 5 p.m., and never have to seek (or encourage his or her employer to seek) workplace productivity solutions elsewhere.

Forbes contributor Grant Feller said that calling LinkedIn a social network would be akin to calling Google a search engine.  Both descriptions are accurate but miss the true value of the firms.  “LinkedIn is a content company.  In effect, Microsoft has just bought one of the world’s most influential, specialised, highly read, constantly-updated (and, it must be said, occasionally annoying) digital media companies around,” said Feller.  “The real value of the site is as a content-publishing platform in which key executives can expand their networks, their influence, their fame, their knowledge, their personas and their opportunities for a better-paid job by providing original content.”

Feller continued that while LinkedIn may at times be annoying or advertorial, LinkedIn produces much of its content.  “It doesn’t just steal and redirect, though it does perform those acts admirably – it allows users to create material that intellectually nourishes.”  However, Feller warned that Microsoft needs to protect LinkedIn from “a creep towards the banalities of Facebook” and improve the user experience.

Mitch Kapor, founder of Lotus Development Corp. and partner of venture firm Kapor Capital, noted that Microsoft has a mixed record with integrating acquisitions.  “Sadly, history has shown [synergies] are very difficult to realize when two big companies combine, especially to the extent LinkedIn is remaining an independent fiefdom within the Microsoft empire.”

A general concern is that Microsoft is probably overpaying for LinkedIn.  Some analysts also questioned the mixing of a non-profitable growth company with a slower growth cash flow company.

Moody’s has placed Microsoft’s  ‘AAA’ credit rating under review as Microsoft will be issuing new debt.

Note: I hold no positions in Microsoft and LinkedIn and have no professional relationships with either firm.

 

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