Microsoft has agreed to acquire LinkedIn for $26.2 billion. This is a massive transaction in the marketplace and is the largest acquisition by Microsoft to-date. At $196 per share, Microsoft will pay a 50% premium over LinkedIn’s closing shares on Friday, June 10. LinkedIn will continue to operate as a separate entity. There is also $725 million breakup fee that LinkedIn must pay if it walks away from the deal so both companies are very motivated to see this transaction close.
Some are saying Microsoft is overpaying, but the high multiple may be justified given the strategic nature of the deal and LinkedIn’s past performance on the stock market.
The Strategic Rationale: Access to Data
Microsoft and LinkedIn have cited a number or reasons for the deal, but the most important one is that the acquisition will give Microsoft access to the data of corporate and business professionals on LinkedIn. This will provide opportunities for cross-selling and developing new products and services for professionals. Eventually these people – you and me – will get marketed to by Microsoft.
Of course, cost savings were also mentioned in the press release as one of the reasons for acquisition. They expect to see savings of $150 million a year by 2018. However, this will not generate growth long-term. What will move the dial is Microsoft’s ability to leverage the data from LinkedIn’s networking platform. Microsoft and LinkedIn will also need to focus on retaining key talent moving forward.
Finding a Solution to the Growth Challenge
Struggling to grow is not a new challenge for business leaders and it’s a problem that even large, public companies like Microsoft and LinkedIn face. Both corporations have faced difficulties in identifying growth opportunities in the public market. On February 12, 2015 LinkedIn’s share price was $265, but one year later, it dropped to $101 per share. Microsoft has also struggled to revitalize its products and follow technology trends and has faced increased competition from other technology firms like Apple, Facebook, Amazon and Google. It was clear that the status quo was not working and both companies needed to find a new pathway to growth.
The market and your industry are always evolving and you need to be prepared to weather change, whether it’s increased competition, regulatory constraints, disruptive new technology or changes in customer demand. For some that means building a solution from the ground up, but at other times it may mean seeking growth outside your core business or turning to external growth. When faced with a saturated market and stagnation, acquisition may be the fastest way to implement a ready-made solution to generate new growth in and gain a competitive advantage.