- Robert Galbraith/Reuters
Monday kicked off to a huge start with the announcement that Microsoft was buying social-media platform LinkedIn for $26.2 billion.
Wall Street analysts were quick to break down the deal and what it means for the broader investing environment.
With a day of perspective behind them, analysts seem split on the move. While LinkedIn provides some good strategic opportunities for Microsoft, the sticker price for a slowing business seemed to turn some watchers off.
We’ve collected the insights from a few of these analysts. Check out their opinions below:
“We believe Microsoft may have overpaid”: Sarah Hindlian and Frederick Havemeyer (Macquarie)
While Hindlian and Havemeyer think that the LinkedIn deal has value, the price tag gave the analysts sticker shock.
“While we believe that LinkedIn’s outlined integrations within Microsoft’s product portfolio make sense (e.g. Outlook/LinkedIn data) we believe Microsoft may have overpaid for a decelerating business with negative GAAP margins,” wrote the analysts.
“We remind investors that much of LinkedIn’s business is non-contractual, non-recurring and transactional in nature (Marketing, job postings, monthly consumer subscriptions, etc.).”
In addition to this negative outlook on the deal itself, the Macquarie analysts believed that Microsoft had more attractive targets that it left on the table. From their note:
We would have preferred Microsoft go “all in” on an enterprise software-as-a-service company such as Salesforce.com, which while we recognize would be significantly more expensive, we believe would be truly transformative.
They maintained a Neutral rating on Microsoft.
“It helps build out Microsoft’s application layer, which has been looking for growth”: Brent Thill (UBS)
Thill thinks that the deal fits in nicely with Microsoft’s strategic direction.
“In our view, the deal makes strategic sense as it helps build out Microsoft’s application layer, which has been looking for growth, and also ties nicely to Microsoft tools such as Delve (org analytics, data visualization), Office 365 Groups, and Power BI,” he said in a note.
On the con side, Thill mentions that Microsoft has never done well with large merger deals – see: Nokia – and there could be a culture clash between the younger LinkedIn thinking and the mature Microsoft way of doing things.
“We also expect the universe of recruiters, the key customer base of LinkedIn, to react negatively to this deal”: Randle Reese (Avondale Partners)
Reese does not think that LinkedIn customers are going to be happy with the deal, despite the benefits Microsoft could bring.
“We also expect the universe of recruiters, the key customer base of LinkedIn, to react negatively to this deal,” the analyst wrote in a note.
“On the other hand, LinkedIn might benefit from the greater size and sophistication of the Microsoft enterprise sales force,” he continued.
“We believe the strategic rationale makes sense”: Mark May and Walter Pritchard (Citi)
May and Pritchard believe that the deal is a win for Microsoft.
“From an Microsoft perspective, we believe the strategic rationale makes sense,” said the Citi analysts.
Their note continued: “LinkedIn has, for some time, been the ‘Outlook address book’ for most business professionals. There are likely new ways Microsoft can integrate/extend this franchise by owning it.”
For LinkedIn, it appears that the sale price of the move is an admission that the company was facing strategic challenges.
The note said:
Not to take away from a nice exit for most LinkedIn investors, but the sale may also reflect an admission of the company’s recent issues. LinkedIn management’s guidance for [calendar year 2016] suggests that revenue growth will slow to ~20% in the second half of the year – down from ~45% just two years previously.
The deal “further enhances Microsoft’s transition from a desktop software firm to a cloud computing services provider”: Brian Pitz (Jefferies)
Pitz said that the deal is a key step in Microsoft’s large-scale shift.
“The acquisition, which is expected to close later this year, further enhances Microsoft’s transition from a desktop software firm to a cloud computing services provider,” the analyst said in a note.
Additionally, Pitz believes that the deal underscores a new trend in technology mergers and acquisitions.
LinkedIn’s unique position and reach highlights the value of a differentiated asset in the Internet landscape.
We believe that M&A will continue to be a theme in the Internet with a focus on uniquely positioned platforms, 100% owned IP, and differentiated technology in fragmented industries.
“We continue to view LinkedIn as a valuable platform”: Heath Terry (Goldman Sachs)
Terry believes that LinkedIn has significant value for Microsoft.
“We continue to view LinkedIn as a valuable platform with a unique network of users, interactions, and data,” wrote Terry. “We forecast revenue and adjusted EBITDA to grow at a 3-year CAGR of 23% and 27%, respectively.”
“All things considered, we tilt modestly positive on the deal”: Karl Keirstead (Deutsche Bank)
Keirstead said that the price Microsoft paid for LinkedIn was not too steep.
“We view the take-out price (6x revs, 21x EBITDA and 36x FCF on 2017 estimates) as reasonable for a 20%-25% growth story, especially given that LinkedIn shares were trading at this level as recently as early February 2016,” said the note.
While there are risks, including the size of debt needed to execute the purchase and the slowdown in LinkedIn’s growth, overall Keirstead felt good about the deal.
“All things considered, we tilt modestly positive on the deal,” he wrote.
“Microsoft is paying a fair price for a unique asset”: Brad Reback (Stifel)
Reback was positive on the deal, noting that LinkedIn offered an opportunity that Microsoft could not develop on its own.
From the note (emphasis ours):
While certainly a large check to write and Steve Ballmer’s Microsoft had mixed success with larger deals in the past, we think Microsoft is paying a fair price for a unique asset that would be very difficult to replicate organically and that there are many monetization opportunities over time. As such we believe the transaction comes with a solid risk/reward profile for Microsoft shareholders.
“$26 billion is a lot to pay in an area that doesn’t address #1 challenge of developer relevance”: Walter Pritchard (Citi)
Pritchard sees upside for core businesses such as Office365, but the price isn’t justified by the opportunity.
“In core, value prop is to march customers up SKU ladder through upsell of offerings that include LinkedIn integration, something we see of value,” said the note. “Still, $26 billion is a lot to pay in an area that doesn’t address #1 challenge of developer relevance.”
The move, in addition, muddles the outlook for Nicrosoft CEO Satya Nadella’s tenure.
“With CEO Nadella on job for 2.5 years, it’s still not clear his posture on acquisitions vs. prior regime, which only seemed to do larger acquisitions when stuck in a tough place strategically,” Pritchard wrote.
“We think the strategic potential to differentiate core application services outweighs the risk”: Keith Weiss (Morgan Stanley)
Weiss, whose firm is advising on the deal, said that skepticism is warranted but that the positive outweighs the risk.
“LinkedIn brings Microsoft a valuable data set, complementary (and monetizable) to the Office 365 and Dynamics portfolio,” said Weiss’ note.
“While Microsoft historically has struggled with large scale M&A and social media, we think the strategic potential to differentiate core application services outweighs the risk.”
The deal also made sense for LinkedIn, said Weiss, considering the capital needed to drive growth.
“From LinkedIn’s perspective, we think this acquisition is also indicative of the higher investments required to drive forward growth for its core businesses,” he said in the note.
“Microsoft has started to deliver on the changes it announced last year.”: Brendan Barnicle, Trevor Upton, and Steve Enders (Pacific Crest)
The Pacific Crest analysts said that the acquisition not only adds a “unique data set” to Microsoft’s library, but it also helps in the company’s fight against its tech rivals.
“Microsoft already had a lead over Amazon and Google in applications because of Microsoft Office,” they wrote. “LinkedIn will extend that lead, in our view.”
Additionally, the analysts believe that Microsoft has learned from its past mistakes in M&A.
“On the call to discuss the acquisition, Microsoft management addressed skepticism stemming from less-successful prior M&A,” said the note. “Microsoft’s CEO, Satya Nadella, stated that lessons learned from prior deals led to the decision to leave LinkedIn’s management team in place.”
“The valuation paid was suspect”: John DiFucci (Jefferies)
DiFucci seemed to be skeptical of the development, dredging up past acquisitions that Microsoft has made as examples of possible failure.
“We view this acquisition as similar to other major acquisitions that Microsoft has made over the years, including aQuantive, Skype, and Nokia,” wrote DiFucci.
“There was some strategic rationale for those purchases, but the valuation paid was suspect, even if those valuations represented only 3-5 months of free cash flow.”
Additionally, DiFucci believes that the culture clash may cause problems.
“Aggressive use of stock based compensation at LinkedIn has come under fire from investors of late, which is in sharp contrast to Microsoft’s approach to compensation.”
LinkedIn has “one of the best business models on the Internet”: Victor Anthony (Axiom Capital Management)
Anthony loves LinkedIn, saying that the company has “one of the best business models on the Internet” and is bullish on the deal for three reasons:
LinkedIn’s Talent Solutions business in strong and is “only 20% penetrated into large enterprises.” The Marketing Solutions and Premium Solutions have a “strong growth opportunity.” LinkedIn’s presence in China is growing, and it is “one of the few Internet companies we believe has a better chance of succeeding in that market.”
The analyst also said that he expects Microsoft’s size and cash to help LinkedIn’s business to grow by leaps and bounds.
Additionally, Anthony said that this means every tech company outside of Alphabet, Amazon, Facebook, and Alibaba is a possible acquisition target.