Microsoft shocked the tech world with the acquisition of LinkedIn in an all cash deal worth about $26.2 billion. But the fact that Microsoft bought a social network focusing on professionals is not surprising. After all, enterprise technology is on what Microsoft’s empire is built on. But paying $26.2 billion for a network that does not rank even in the Top 10 in terms of active users or user base does raise some questions.
To put it in perspective, the money that will be paid for LinkedIn, will make this the third biggest acquisition in the tech space, just behind Dell’s $67 billion buyout of EMC last year and Avago’s $37 billion acquisition of Broadcom earlier this year. This is more money than was paid by Facebook for Whatsapp in 2014 or even what Microsoft paid for Nokia’s phone unit in 2013. Of course, these figures need to be adjusted to make a completely fair comparison but this is interesting nevertheless.
So, why is Microsoft willing to pour all this cash for LinkedIn, which has a user base of just over 400 million?
If there is one thing that Microsoft has always lacked, it is a strong network. In fact, both Google and Microsoft have always lagged behind in this area despite numerous attempts. As Preetham Venkky, Head of Digital Strategy & Business at KRDS Asia explains, “LinkedIn brings in network platform for Microsoft and it enables them to reach out to enterprise users.”
The enterprise space has always been Microsoft’s strongpoint but this dominance has seen some serious challenges in recent years. According to Gartner, among enterprise customers, 13 per cent of publicly listed companies use either Microsoft Office 365 or Google Apps for Work. Of this 13 per cent, says the study, 8.5 per cent of public companies use Office 365 while 4.7 per cent use Google’s cloud-based productivity offering. On the CRM front, Salesforce dominates the global scene and despite being among the largest cloud service providers, it has still found it difficult to break Salesforce’s stranglehold, especially in the SaaS space.
This is where LinkedIn might come in, and in fact, Microsoft chief, Satya Nadella, alluded to this while announcing the acquisition. “The LinkedIn team has grown a fantastic business centered on connecting the world’s professionals,” Nadella said. “Together, we can accelerate the growth of LinkedIn, as well as Microsoft Office 365 and Dynamics as we seek to empower every person and organization on the planet.”
Explains Vishal Tripathi, Research Director at Gartner, “They (Microsoft) wanted to have a strong enterprise presence. Among all the social media, LinkedIn was the best possibility. It has a lot of selling tools, some of them positioned similar to Salesforce.com. This gives Microsoft a readymade platform to sell their products. So, the acquisition seems to be about creating a strong enterprise presence and a new way of selling their products.”
Another important factor could be content. LinkedIn has been focussing on establishing itself as a premier publisher platform and Microsoft would love to be able to reach out to professionals through content specifically created for them.
Win-win deal for LinkedIN
The company has been facing some pressure from investors regarding revenues, especially ad revenues. Total revenue for Q1’16 stood at $861 million, an increase of 35 per cent YoY.
“The acquisition means that LinkedIN will be shielded by Microsoft from the stock market, atleast for the next 5 years,” says Venkky, which will reduce pressure and allow them to concentrate on developing the product.
But this is where the main issue lies. Both Microsoft and LinkedIn hardly have a great track record of building or nurturing great products. Microsoft’s track record with past acquisitions is also nothing to write home about. Will this prove true in this case too?
“I do not see any synergy between the companies. LinkedIn has not been taken seriously as a product company. They have never had product as the focus so how will they attract talent? Product always trumps network,” argues Venkky.