Microsoft's $26.2 billion purchase of LinkedIn is one of the most expensive tech deals in history. It may not be one of the smartest.
Unassailable during the desktop-computing era, Microsoft is still the world's largest software-maker but now has to compete with rivals such as Google and Amazon as computing shifts toward mobile devices and the cloud. Unlike his predecessor, Steve Ballmer, who was slow to invest in these areas, Microsoft CEO Satya Nadella has a grand plan to reposition Microsoft.
There are three hitches in Microsoft's plans. The first is financial. It is shelling out the equivalent of around $260 for each monthly active user of LinkedIn and a 50 percent premium over LinkedIn's share price. To keep shareholders happy, it will need to add users to LinkedIn's platform more quickly or be clearer about how it can make more money from their data.
The second is operational.
Microsoft's record with big deals is poor. Its purchase of Skype in 2011 for $8.5 billion has been no runaway success. Microsoft spent $6.3 billion on aQuantive, an online-advertising firm that it bought in 2007, and $7.6 billion on Nokia's handset business in 2014.
Both misfortunes happened before Nadella took over, but "the historic playbook says it's not going to work," said Brent Thill, an analyst at UBS.
Nadella intends to keep LinkedIn as an independent company, perhaps because he has seen the pitfalls of integrating large acquisitions firsthand.
The third hitch is behavioral.
Nadella wants LinkedIn to become the place to go for news and other details about people's work lives, but firms are unlikely to want to give their employees more of an excuse to spend time on social media.
Some bosses regard LinkedIn with hostility because it makes money from recruiters out to poach their staff. They will not want to let LinkedIn further embed itself at their companies. Users may also grow uncomfortable if Microsoft deploys their data elsewhere, and users could stop using the service because of it.
The deal has been welcomed for other reasons, however.
It could signal an impending tech buying spree. In the days after LinkedIn's purchase, investors looked around to see which other firms Nadella and his peers might have their eyes on. Optimists pushed up the share price of Twitter, another social-media firm whose growth prospects have been questioned, in the hope that a buyer might make a move.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.
