Market Insight

Microsoft to acquire professional social networking company, LinkedIn for $26.2bn

June 15, 2016  | Subscribers Only


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Microsoft announced the intention to acquire professional social networking platform, LinkedIn for $26.2bn, in an all-cash transaction. The acquisition is expected to close by the end of 2016, subject to regulatory approval in the US, Canada, the EU and Brazil. LinkedIn will continue to operate independently from its new parent company.

Microsoft reported revenues of $88.1bn in FY 2015, down -5.7% year-on-year. LinkedIn generated $3.0bn in revenue in 2015, up 34.8% year-on-year, the majority of which comes from its “Talent Solutions”, which are mostly recruitment ads and fees. 

Our Analysis

The acquisition of LinkedIn is a smart move by Microsoft and will help the tech giant expand its footprint in a number of areas, where it currently lags behind its peers:

  • Social media presence: this is not Microsoft’s first endeavour into enterprise social networking. In 2012 it acquired Yammer, for $1.2bn, which was integrated into Microsoft’s Office division. The integration was not well-executed and the value of Yammer was mostly written off. A social media presence is crucial in today’s digital economy as the majority of time spent online is on social media sites and apps. Social media platforms are not used just for communication, but also consuming news, videos and other content. LinkedIn is an established social networking site with 433m registered users globally, of which 105m are monthly active users (MAUs). This may pale in comparison to Facebook’s 1.6bn MAUs, but the value of a LinkedIn user is often higher due to the demographics of its business audience and appeals to large brand advertisers.
  • Integration with existing Microsoft services:  one of the main synergies between the two companies is slotting LinkedIn into Microsoft’s “professional cloud”. Microsoft has developed Microsoft Office 365 and Dynamics and the LinkedIn acquisition fits in with Microsoft’s goal to build a business technology brand. From an advertising perspective, IHS has identified two areas of integration. Firstly, LinkedIn can be leveraged to enhance Microsoft’s Skype. Skype is currently one of Microsoft’s most valuable properties. With over 300m monthly active users, it can offer brands scale. However, Skype currently lacks depth of user understanding due to the limited functions of the Skype platform. By combining the Skype communication tools with LinkedIn user data, Microsoft can improve the targeting on both platforms and improve its monetisation of Skype advertising inventory. The Skype/LinkedIn integration also puts Microsoft in good stead to tackle the long-term future of digital content consumption, which is heading towards messaging bots. Combining the communication capabilities of Skype with the content publishing and sharing on LinkedIn will create a powerful product, which can operate in the niche business environment and/or compete on a wider scale, if expanded correctly. The second and perhaps less obvious area of integration for the two companies is between LinkedIn and Microsoft’s Bing. Although far behind from Google in the paid-for-search business, Bing has recently noted a resurgence in its search share due to the launch of Windows 10 (which has Bing pre-installed in its operating system). At the IAB Europe Interact conference in Lisbon in May 2016, Microsoft stated that 18% of searches in the UK are performed on Bing, 11% in France and Norway and 10% in the Netherlands. If executed correctly, embedding Bing into LinkedIn could create the first social media search engine (excluding Facebook’s Graph Search, which has had limited success) and further grow Bing’s search market share and LinkedIn’s dwell time, which currently lags behind other social media sites like Facebook, Instagram and Snapchat.
  • Further expansion into China: LinkedIn is one of the few Western social media sites which operates in China, giving it an advantage over the other online giants like Google and Facebook. Microsoft’s Bing is also already working with Sogou, the second largest search engine in China after Baidu. Microsoft hopes to leverage LinkedIn’s presence in China both to continue to expand the social networking platform further into the Chinese market, but also to proliferate the Chinese adoption of other Microsoft products.

The timing of the acquisition was also fitting for LinkedIn, whose first half of 2016 has so far been rocky, with revenue and users growing below analysts’ expectations. However despite this, the company cost more than most recent acquisitions in the space including Facebook’s WhatsApp ($19bn in 2014), Verizon’s AOL ($4.4bn in 2015), Microsoft’s Nokia’s phones unit ($9.4bn in 2013) and the probable value of Yahoo’s upcoming sale (around $3.0bn imminently). Microsoft will hope that this acquisition will resemble the success of Skype ($8.5bn in 2011) more so than that of Yammer ($1.2bn in 2012).

 

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