Does MS know what it’s doing?
Microsoft’s $26bn acquisition this week has many analysts scratching their heads
ASTRING of questions ran through my mind this week when software giant Microsoft announced it was buying professional social network LinkedIn for $26.2-billion (about R400-billion) in cold, hard cash.
Just how profitable is LinkedIn to command a price like that?
The short answer is not profitable at all, at least not according to us accountants, but then again there isn’t much conventional logic in the prices paid for such businesses.
With the amount of money Microsoft is paying for LinkedIn, you could buy yourself all of Barclays Africa, all of Nedbank, all of Capitec, all of Investec, and still throw in half of Standard Bank for good measure.
LinkedIn has been steadily unprofitable despite rapidly growing sales. Total revenue for the first quarter of the year increased 35% year on year to $861-million.
Its revenues have come largely from connecting job-seekers with head-hunters — it has been a recruitment company’s dream.
LinkedIn launched a specialist product, Talent Solutions, in 2008, which has made recruiters’ work easier and reduced their acquisition costs, leading to a better hit rate for an industry remunerated on placement hits.
Talent Solutions is LinkedIn’s biggest revenue stream, bringing in more dollars than its adverts and subscriptions.
Perhaps what is more relevant is revenue growth — for Talent Solutions it was 41% year on year in the latest numbers, compared with 29% for advertising and 22% for premium subscriptions.
Makes you wonder if Reid Hoffman and his LinkedIn co-founders had any idea they were creating a talentscouting network when they initially built the platform.
But then again, who cares — they are about to hit $1-billion revenue per quarter, with 433 million users, and are about to get a couple of billion from Microsoft for the business they started in 2003.
The other intriguing question is why Microsoft would pay cash for LinkedIn.
Did LinkedIn shareholders and the founders not want its paper?
Or did Microsoft — which has an AAA credit rating from Moody’s and S&P Global Ratings — see it as a great opportunity to raise debt in these times of ultra-low interest rates?
Perhaps the LinkedIn deal also presents an opportunity for Microsoft to utilise its large cash reserves.
What about Microsoft’s record in buying similar businesses and integrating them into its extensive Microsoft Office customer base?
“Microsoft’s track record at bigbudget acquisitions is poor,” said New York-based technology editor Peter Bright of Ars Technica.
“Marketing firm aQuantive was bought for $6-billion in 2007; that led to a $6.2-billion write-down in 2012,” he said.
“Nokia’s mobile phone division was bought in 2014 for about $6.1billion. This led to write-downs totalling about $8.5-billion in 2015 and 2016.
“The company bought Skype for $8.5-billion in 2011, and while Skype continues to be a going concern, it has ceded ground in many areas. Messaging platforms such as WhatsApp and Facebook Messenger have boomed, leaving Skype behind.”
So how will Microsoft justify the big cheque to its shareholders?
The company claims that the total addressable market of the combined companies is larger than either enjoys separately.
Bright argues that “though this may be true if one narrowly compares, say, Office 365 and LinkedIn, this seems harder to justify if one considers the broader Office base of some 1.2 billion users. A good proportion of LinkedIn users are already going to be Microsoft users, and a great many Microsoft users will be on LinkedIn already.”
Back in my investment banking days, my then boss once lectured me about the difference between price and value — price is what you pay for the asset, value is what you believe the asset is worth to you.
Satya Nadella, CEO of Microsoft, would do well to remember that.
Khumalo is chief investment officer of MSG Afrika Group and presents “Power Business” on Power 98.7 at 5pm, Mondays to Thursdays
Price is what you pay for the asset, value is what you believe the asset is worth to you