Social network for Windows: why Microsoft paid LinkedIn $26.2 billion

The logo of the social network LinkedIn

The biggest deal

On Monday, Microsoft agreed to buy the social network LinkedIn, according to a press release from the Corporation. The number of users of the resource available in 200 countries, exceeds 433 million Microsoft has estimated the services in $26.2 billion is one of the largest deals in the industry and the largest in Microsoft’s history. As conceived by Microsoft, LinkedIn will become the “social fabric” products of American corporations, including operating system Windows, service Skype voice calls and package of MS Office programs, and give users the ability to combine work with network communication.

The ideologist of the biggest deals in the history of Microsoft CEO Satya Nadella, who headed the company in February 2014. During his leadership of Microsoft the company’s shares increased by about 46% at the time of entry of Nadella to the post they cost $34,20, on Tuesday afternoon, June 13 a little less than $50. Nadella has done a good job trying to turn Microsoft from a seller’s to a company that focuses on social media, but the company’s Board of Directors insists on an even more rapid transition to software and services delivered via the Internet, says Bloomberg.

Buying LinkedIn Nadella expects to strengthen the position of Microsoft in the b2b segment, in which the Corporation has achieved greater success than in the market smartphones. Instead of regular Windows users, Nadella is betting on corporate customers, which offers cloud services and office applications.

The deal, among other things, will help Microsoft to make up for missed opportunities in the segment of social services, which now dominate Facebook by WhatsApp and Google’s YouTube, Bloomberg wrote. It will also expand portfolio of core Microsoft products in the trading, marketing and recruiting tools.

The parties agree that LinkedIn will retain its brand, corporate culture and independence, and the founder of the company Jeff Weiner will continue to serve as the acting CEO of the social network.

The growth of LinkedIn in recent years has slowed and investors have become much more wary of high estimates of the capitalization of many IT companies. Both factors could persuade the owners to sell LinkedIn the social network, told Reuters an unnamed analysts.

According to Nadella, advice on the transaction began in January, shortly before LinkedIn gave a forecast of its revenue for the first quarter was below market expectations. That day, February 5, shares in the social network fell by 43.6%, per day reducing its capitalization to $11 billion. the Negotiations have reached a new level, when Nadella talked about his vision of the structure of the network, assuring Weiner that LinkedIn will remain an independent company like WhatsApp, owned by Facebook, and YouTube, owned by Google.

Most spent on the purchase of social networks

Facebook and WhatsApp.
$22 billion

In October 2014, social network Facebook has closed a deal to acquire mobile messenger WhatsApp. Under the terms announced in February 2014, WhatsApp was bought for 7.9% of Facebook shares worth $12 billion and $4 billion in cash. In addition, it was assumed that the employees of WhatsApp over the next four years will get limited stake in the $3 billion Total transaction value was estimated then at $19 billion, but due to the rising cost of Facebook shares by October 2014, the amount increased to $22 billion.

Google and YouTube.
$1.65 billion

Google acquired YouTube in October 2006. The creators of YouTube have traded the company’s shares for the shares of Google, valued at $1.65 billion Deal suggested that YouTube will retain its brand, complementing the video services of a search engine, while Google will post on YouTube their ads.

Google and Waze.
$1.1 billion

Another, slightly less major deal Google has implemented in June 2013, buying Israeli company that geosocial service Waze for $1.1 billion According to the Israeli techno-blog GeekTime, $1.03 billion had to move cash directly into the hands of the shareholders of Waze. Another $100 million distributed among employees in proportion to their contribution to the success of the company.

Yahoo! and Tumblr.
$1.1 billion

Another Internet company Yahoo! paid for the purchase of the hosting blogs Tumblr in may 2013 for $1.1 billion. This was the seventh and largest transaction of the Internet company since the arrival of Marissa Mayer to the CEO post in June 2012. Yahoo! paid the full amount in cash, and CEO and founder of Tumblr David Karp had to get about $250 million At the time of purchase from <url> was 300 million users per month, and Mayer hoped to engage with this younger audience to all the other services and products of Yahoo!.

Facebook and Instagram.
$1 billion

In April 2012 Facebook announced the purchase of photo service Instagram for $1 billion Facebook paid for the app money and own shares, wrote Forbes. Under the deal, the lens retained its brand and top management and developed independently from Facebook.

Social network specializing

LinkedIn was founded in December 2002 in the living room programmer’s Reid Hoffman (Reid Hoffman), who has worked on the first prototypes of social networks in Apple Computer and SocialNet.com. Itself the social network was officially launched on 5 may 2003. A month later the number of Internet users has reached 4.5 thousand people, and by 2006 their number increased to 20 million.

Unlike Facebook, which was intended for communication within the University community, and then became a global platform for people of all ages and professions, the founders of Linkedin has decided that their social network will be designed for communication between colleagues and build business relationships. Part of why LinkedIn has not received comparable number of Facebook users, but retained the expertise and valuable audience professionals using it to create a working network of contacts for work, and primarily for job search. This model has simplified the social network monetization through advertising, more difficult for competitors.

Selected LinkedIn the direction of development coincided with the increasing use of social media by recruiters. By 2015, according to the annual report of the company Jobvite (specializiruetsya Analytics in HR), social networks in the search for and recruitment of workers use 92% of employers. In the list of social networks, which they called, LinkedIn ranked first with 87%, Facebook only the second (55%) and by a large margin.

From 2003 to 2005, LinkedIn has attracted more than $100 million in funding from major investment funds, including Greylock, Sequoia Capital, Bain Capital, Bessemer, Goldman Sachs, The McGraw-Hill, SAP ventures. According to the results of one of these investrend, in June 2008, the social network was valued at $1 billion by 2010, its rating rose to $2 billion In April 2011, LinkedIn had its IPO, on the new York stock exchange at the top of the range, raising $352 million, and its market capitalization of $4.25 billion During the first trading of the shares of the company soared to $of 94.25, more than doubling its initial capitalization to $8.9 billion.

By the time of the IPO, the number of registered Linkedin users exceeded 102 million. In 2011, LinkedIn surpassed Twitter in advertising revenue to $154,6 million versus $139,5 million, respectively. We use a diversified business model. The social network earns on solutions for employers, recruitment agencies and advertising, as well as a paid subscription for users, giving advanced functionality. In the first quarter of 2016, LinkedIn’s revenue has grown at an annual rate of 35%, to $861 million Of which 65% ($558 million) were in the paid services for tenants, 18% ($154 million) on advertising revenues and 17% ($149 million) on a paid subscription.

However, the last few years, Linkedin remains unprofitable: in 2015, the company’s net loss amounted to $164,8 million on revenue of $2.99 billion

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More than the social network

To mark the announcement of the deal presentation, Microsoft talked about how the company plans to integrate LinkedIn in its product line. According to Microsoft’s vision of a social network it will turn into another working tool of a user and will rise in line with other programs and applications Microsoft: Windows, Outlook, Skype, Excel, PowerPoint, etc.

So, according to Nadella, if the user used to make the Microsoft Outlook calendar meeting is integrated into the mail client, LinkedIn will be able to find and provide additional information about those with whom he planned the conversation. For example, one of his companions might be fellow colleagues or other people with which the user is indirectly linked in some other way.

Microsoft also intends to integrate LinkedIn’s customizable news feed, where service will be able to offer articles on topics similar to projects he is doing on the job. The consulting function of LinkedIn will use the resources of social media to find and offer the user a specialist, if in the course of working on one project or another from the first there was a need for additional expertise.

In addition, Microsoft will be able to integrate LinkedIn into a comprehensive system of customer relationship management (Client Relationship Management CRM) for sales and to enter the territory of Salesforce.com, said Anurag Rana, senior analyst at Bloomberg Intelligence. “In the future, LinkedIn may become a serious competitor to Salesforce”, concluded the expert. Analytical algorithms to enhance LinkedIn Microsoft Dynamics tools for working with data. Now Microsoft Dynamics a direct competitor to Salesforce in CRM systems.

The largest acquisition Microsoft

$8.5 billion for conversations

Prior to the acquisition of LinkedIn largest deal Microsoft was the purchase of the service Internet telephony Skype in may 2011. It was assumed that after the merger closes, Skype will become a division of Microsoft and will implement support of their software for the Xbox consoles as well as phones and other devices on Windows. In turn, Microsoft wanted to integrate Skype users with their communities Lync, Outlook, Xbox Live, etc., and enhance position in the market of Internet services. By the end of 2015 the number of active Skype users exceeded 300 million, however the service was unable to promote other products from Microsoft and is facing increasingly stiff competition from mobile messenger.

$7.6 billion for the phones

In 2013, Microsoft paid 5,44 billion for Nokia mobile business. Under the terms of the transaction 3,79 billion Corporation paid for production of gadgets and services, and 1.65 billion for licensing of Nokia’s patents. In may 2016, Microsoft announced the restructuring of the mobile business. The company will sell a business selling “entry-level phones for $350 million Finnish FIH Mobile subsidiary of Taiwan’s Hon Hai HMD Global. Global HMD will also receive a global license to manufacture smartphones and tablets Nokia for a period of ten years. The deal should be closed in the second half of 2016 after the approval of the regulators.

$6 billion for advertising

In 2007, Microsoft acquired the us advertising company aQuantive Inc. For each share of aQuantive was paid $66,5, which amounted to a premium of 85% to the share price at the close of the last trading session. In 2012, software giant acknowledged that the aQuantive business proved to be unprofitable. “No purchase has accelerated the growth of [business] to the expected level,” said a statement from Microsoft on the write-off of losses from the transaction. Only for the second quarter of 2012, the Corporation wrote off $6.2 billion with profits, to cover costs incurred as a result of investment in aQuantive.

$2.5 billion for the game

In September 2014, Microsoft acquired Swedish manufacturer of video games Mojang together with the rights to the cult game Minecraft. In Microsoft are assured that they intend to make Minecraft available on all gaming platforms. In the summer of 2015 edition of Wired has published an excerpt from the book Minecraft: The Unlikely Tale of Markus Notch Persson, which States that all employees of Mojang were offered $300 thousand for the fact that they have been working in the Studio six months after the transaction.

$1.5 billion for the schedule

For company graphics packages, Visio Corporation in 2000, paid $1.5 billion, This transaction was profitable for Microsoft as Visio products filled the gap in the range of the American IT giant. Visio is still included in some kits Microsoft Office.

“Overpriced”

Shares of LinkedIn on the new York stock exchange on news of the deal has soared 47%, to $192,21 the largest jump in the price of the social network since 2011. Lately as investors question evaluated the long-term prospects of the company since the beginning of the year on Friday, June 10, shares of LinkedIn lost 42%. Paper Microsoft after the announcement of the impending deal fell 2.6%, to $50,14: analysts felt that the cost of the transaction overestimated.

Under the agreement, Microsoft will pay $196 per share from LinkedIn, which constitutes a premium of $49,5 to the price of the securities of the social network at the close of trading on June 10. The entire amount $26.2 billion will be paid in cash. Microsoft is paying for LinkedIn’s 91 times more than its EBITDA for 2015 this multiplier is the most expensive deal in 2016. First, the median EBITDA multiplier deals Microsoft was 34 EBITDA.

During a conference call, Microsoft said that the company has a stable cash position and it will continue to invest in growth. Moody’s, in turn, has placed the debt rating of the U.S. Corporation on review for possible downgrade. According to the Agency, the deal for the financing of which the IT giant will have to attract third-party funds, will increase the company’s total debt to EBITDA of two.

Microsoft and Johnson & Johnson currently the only American Corporation that retained the highest credit rating of AAA. Microsoft has a cushion of $105 billion in cash and other liquidity, but will attract borrowing to reduce the tax burden.

Bet on growth

Under the leadership of the previous CEO Steve Ballmer, Microsoft also acquired several large assets, whose potential was never realized. In 2012, Microsoft announced the write-off of $6.2 billion transaction 2007 acquisition of online advertising company aQuantive. In mid-2015, Microsoft announced the write-off of $7.5 billion on the deal of 2014 for the purchase of telephone business of the Finnish Nokia, which was then estimated at $9.5 billion.

Skype acquired by the Corporation in 2011 for $8.5 billion, and has not been integrated into other Microsoft products. Deal of 2012 for the purchase of enterprise social network Yammer has produced mixed results. The only exception to this background was the acquisition of Mojang AB, developer of video games, including Minecraft, it already oversaw Nadella. Buy LinkedIn, among others, the opportunity to reverse this negative trend.

Evaluating promising assets, Nadella takes into account three aspects: the potential of expanding the market, advanced technologies, and also integrates with business, Microsoft, said a top Manager in an interview with Bloomberg Television. Buy LinkedIn meets all these criteria, he added. “The deal is an Association of leading professional cloud provider and the leading professional network, quotes Agency the words of Nadella. We believe that we can accelerate this process by turning LinkedIn into the social fabric of the entire Office.

“For Microsoft this is a very important bet on growth,” Reuters said the expert of the analytical company Forrester Ted Sadler. According to Microsoft, with the acquisition of LinkedIn the potential volume of the market of services in the segment of business processes and productivity tools increased from $200 billion to $315 billion.