Did Microsoft Overpay For LinkedIn?

Microsoft’s recent $26.2 billion acquisition of LinkedIn provides a graphic example of a strategic acquisition – the type of sale that generally garners the greatest gain for the acquired company’s shareholders.

You may be wondering what a billion-dollar acquisition has to do with your business. The very same reasons a strategic acquirer buys a $26 billion business holds true for the acquisition of a $2 million company.

The financial vs. strategic buyer

A financial buyer is buying the future stream of profits coming from your business, whereas the strategic buyer is buying your business for what it is worth in their hands. To simplify, a financial acquirer buys your business because they think they can sell more of your stuff, whereas a strategic buyer acquires your business because they think it will help them sell more of their stuff.

Some people argue that Microsoft overpaid for LinkedIn, given that LinkedIn only generated a few hundred million dollars in EBITDA last year. That means that the good folks in Redmond paid an astronomical multiple of LinkedIn’s earnings. But earnings are far from the only thing strategic acquirers care about when they go to make an acquisition.

Microsoft‘s acquisition of LinkedIn is an archetypal example of a strategic acquisition. The technology giant has been undergoing a major transformation from being a software company focused on operating systems to becoming a business concentrating on cloud-based software applications. Microsoft enjoys a dominant market share in the basic tools white-collar business people use to get their job done, but other software packages have begun to nip at the heels of their dominance in many product lines.

Take Microsoft Office for example. Many businesses have started to use competitive offerings, from Google and Apple, to similar tools for certain industries and verticals. Even more companies cling to older versions of Microsoft Office software, even as Microsoft is keen to move everyone over to the cloud-based Office 365.

In purchasing LinkedIn, Microsoft saw an opportunity to suck data from LinkedIn into Microsoft’s cloud-based software applications, making them irresistible. Imagine you’re a salesperson and you just landed a big meeting with a new prospect. You enter the appointment as a Microsoft Outlook event and suddenly the details of the event feature everything LinkedIn knows about your prospect. Now you can make small talk about where they went to school, their previous jobs, and know the scope of their current role – all without ever leaving Outlook.

Microsoft is betting this kind of integration across its platforms will compel more people to upgrade to the latest software applications. While your business is likely smaller than LinkedIn, the same thing that makes a giant acquire another giant holds true for smaller businesses. To get the highest possible price for your business, remember that companies make strategic acquisitions because they want to sell more of their stuff.

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