On June 13, 2016 Microsoft announced the agreement to acquire LinkedIn for USD 26.2 billion. Important to note that this is the first big deal under Satya Nadella’s leadership and LinkedIn will continue to operate as an independent company. Albeit this (in theory) will allow more room for innovation, let’s put this announcement in perspective:
Microsoft has paid nearly 9 times for LinkedIn’s current revenue. In 2015, LinkedIn’s revenue was pegged at USD 3 billion – of this USD 2 billion was accrued from Talent solutions, a market that Microsoft does not serve currently and addresses via its Human Capital Management (HCM) partners. Hence, only 30% of LinkedIn’s revenue (USD 1 billion) has a direct correlation and impact on Microsoft product portfolio currently.
This acquisition comes at a time when LinkedIn recently failed to impress the Wall Street. LinkedIn’s share price took a solid beating of 43.6% earlier this year in February 2016 – in other words, the company shed USD 11 billion in market valuation in one day.
This approach has been tried more than half a decade ago and at a fraction of cost. It’s worthy to point out that Salesforce.com tried solving the same puzzle in 2010 by acquiring Jigsaw (LinkedIn’s poorer cousin) for USD 142 million and forging partnerships with companies like D&B, Hoover’s and LexisNexis.
Microsoft in the past hasn’t done justice to acquisitions. Going by existing evidence, Microsoft hasn’t been able to create solid impact and outcomes from Yammer, an acquisition worth USD 1.2 billion in 2012. To make matters more complex, this announcement comes in close proximity to the recently failed acquisition of Nokia for which Microsoft paid USD 7.6 billion in 2014.
Satya Nadella’s vision of the new and improved Microsoft (focused on the enterprise) isn’t met by similar gusto by country and regional teams. The company’s ability to actualise Satya’s vision on the ground still remains to be largely work-in-progress and in many ways a distant dream. Per a Greyhound Research study more than 70% developers in the Asia-Pacific including Japan (APJ) region continue to focus their investments on Amazon Web Services (AWS) that allows them a host of opportunities including participating in the swelling ecosystem to help in monetization.
Having said the above, Greyhound Research believes this acquisition among other recent announcements like investments in Azure, Office365, Windows10 and new partnerships (with SAP) helps put Microsoft on the right trajectory. However, it also makes the competition more intense between the 3 behemoths – Google, Facebook and Microsoft – who are now aggressively targeting the enterprise spend on productivity tools. Below are key highlights of why this deal matters to both parties involved and especially their individual users and organisations:
A combined user-base (read identities and personal data) 5 times the total population of US. While as part of this acquisition Microsoft gains 433 million users across 200 countries, the total number of identities post-merger (end of 2016) will touch nearly 1.5 billion.
Access to LinkedIn’s Business solutions, Developers and Content Ecosystem. This includes LinkedIn’s Talent, Marketing, Sales solutions and LinkedIn Marketing solutions: Financial Services, a platform used by Financial Services marketers globally for audience insights and industry research. In addition, Microsoft gains access to a solid regular user base of SlideShare (LinkedIn’s content sharing platform) and Pulse (LinkedIn’s news aggregation and reading platform).
Ability to target newer breed of IT Decision Makers. While Microsoft has been traditionally selling to Chief Information Officers (CIOs) and Chief Information Security Officers (CISOs), it has struggled to establish a connect and recall with newer IT Decision Makers (LinkedIn’s core buyers) like Chief Marketing Officers (CMOs), Chief Sales Officers (CSOs), and Chief Human Resources Officers (CHROs).
Current and potential revenue stream from advertising. LinkedIn’s advertising offering will add mobile and desktop advertising revenue to Microsoft’s wallet. With LinkedIn reporting 49 percent growth Year On Year (YOY) to 60 percent mobile usage, adverts will prove to be a sizable net new revenue opportunity for Microsoft.
Increase in spend on Research & Development (R&D) to improve experience & integration. While this investment is both expected and necessary to drive tighter integration between the companies’ products, Greyhound Research expects initial efforts to be focused on improving User Experience of the core products – the LinkedIn website and mobile app. It might be worth noting that much of this may be done in India (LinkedIn recently opened a new office in Bengaluru). Greyhound Research believes while LinkedIn team has done a great job at overhauling user experience on its’ mobile apps (LinkedIn, Slideshare & Pulse), its core product (LinkedIn website) needs urgent attention.
Native integration between Microsoft Dynamics CRM, Office365, Cortana & LinkedIn products. Post its failed attempt to acquire Salesforce.com and losing it to arch competition AWS, Microsoft has made a clear attempt to regain lost ground and offer stiff competition on back of its product, Dynamics CRM. Microsoft is aiming to use the acquisition of LinkedIn to help beef up its ability to generate high quality leads, run marketing campaigns with improved ROI and offer deep customer insights. With user data and insights as the key focus of this announcement, we believe the use-case of integration with Cortana will add immensely to the sales teams. However, it remains largely unaccepted in its current form.
Growth in new (and active) user-base on back of common identity. Greyhound Research believes there’s ample headroom for Microsoft to onboard current users with Microsoft identity and not present on LinkedIn. This will allow the company to use these accounts as a common identity to access LinkedIn and other Microsoft services such as Skype – something Google has pioneered. Greyhound Research believes this acquisition is a much needed breather for LinkedIn that was struggling to add fresh users and increase page views dramatically.
The much needed position in Social arena. It might be of interest to note that while Microsoft is invested in Facebook, it continues to struggle with its efforts to gain notable presence in social technologies. Greyhound Research believes this opportunity will offer Microsoft the much needed shot in the arm.
Reform Learning & Development market. Greyhound Research believes Microsoft also stands to significantly gain from the recent LinkedIn acquisition of Lynda.com (video-based eLearning). This can help Microsoft use the platform to embed social learning as part of the broader Microsoft productivity environment.
Growth in ad revenue on the back of Bing. At Greyhound Research we believe Microsoft will now have the potential to grow LinkedIn’s advertisement network by placing these ads well within its search engine Bing. Having said that, Microsoft has a significant problem of reach and recall to be solved with Bing that has received little or no acceptance from markets outside US.
Albeit the complimentary nature of this acquisition is hard to miss, Microsoft runs the potential danger of missing this opportunity bus. Below are areas that we believe remain the company’s weak links:
Not all LinkedIn solutions fit naturally in Microsoft’s portfolio. Greyhound Research believes LinkedIn’s Recruiter solution is not a natural fit in Microsoft’s current product portfolio. Much R&D and development will need to be done before Microsoft can claim presence in the HCM market. It’s critical for Microsoft stakeholders to remember that the HCM market is going through a rapid change and traditional HCM vendors like SAP and Oracle are facing intense competition from specialised players like Ramco, Cornerstone OnDemand among others.
Ability to run campaigns alone is not enough. Greyhound Research is of the firm belief that organisations are increasingly questioning investment in CRM tools that don’t allow for Campaigns to reach a natural closure to Commerce. The recent acquisition of Demandware by Salesforce.com underpins this growing trend. Furthermore, while Microsoft has Dynamics CRM and now LinkedIn’s Sales and Marketing solutions, their ability to deliver a true SocialSelling experience remains limited and much attention is required to deliver ads natively on the mobile and drive commerce (where companies like Inmobi have done well).
What can individual consumers expect?
A hike in subscription fee. Microsoft might offer add-on products and services and improve website and mobile app user experience to justify the increase in subscription price. This outcome can well be expected in early 2017. At Greyhound Research, we expect Microsoft to invest significant muscle in pushing attractive bundling and licensing options that will encourage LinkedIn solutions users to acquire more Microsoft services and vice versa.
What can IT Decision Makers expect?
More complex decision making process. Greyhound Research expects Microsoft to offer native integration with LinkedIn solutions – hence an improved experience (and stickiness) compared to the current integration to its Dynamics CRM and Office365. This will allow sales, marketing and customer service teams to migrate customer data to and from traditional productivity environment of Outlook, Word, Excel, Skype among others. As and when the integration is expected to go live, CIOs can expect Microsoft reps requesting for introductions to other key decision makers like CMOs and CSOs to talk about SocialSelling, Content Marketing, Advertising among other things. Greyhound Research advises CIOs to prepare for a renegotiation of their existing contract to accommodate for additional subscriptions.
Research Analysts:
Sanchit Vir Gogia: Sanchit is the Chief Analyst & CEO of Greyhound Research, an Award-Winning, Global, Independent IT & Telecom Research & Advisory firm. He also serves as Chief Futurist, Founder & CEO of Greyhound Knowledge Group, a Global, Multi-Disciplinary Research & Advisory firm. Given his expertise and passion for Technology, Sanchit also doubles up as the CIO for Greyhound Knowledge Group companies and is building a technology-led Research & Advisory business. In his another avatar, Sanchit is an Advisor To The Board (for IT & Business decisions) of a US$100 Million+ organisation in the Metal Industry. To read more about him, click here.
Anshoo Nandwaani: Anshoo serves as a Vice President and Principal Analyst with Greyhound Research, an Award-Winning, Global, Independent IT & Telecom Research & Advisory firm. She also serves as Chief Human Resources Officer (CHRO) of Greyhound Knowledge Group, a Global, Multi-Disciplinary Research & Advisory firm. In her current role, Anshoo leads the research agenda for The Empowered Workforce theme. As part of this theme, she studies the impact of vertical-specific processes and workforce-centric technologies on workforce lifecycle and overall business alignment. At Greyhound Research, we refer to this as the Workforce Empowerment Systems (WES). To read more about her, click here.
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Love your opening perspectives. Looks like not all is hunky dory at LinkedIn. Their share price has been wavering especially since Feb. Do you think this was by any chance a distress sale?
David, thank you for your comment. Hard to tell if it’s a distress sale – IMHO likely not. Nonetheless, what goes without saying is that the state of affairs was getting worrisome since the stock has been volatile and that is never a healthy sign. Ultimately, it’s all about driving users to share more data and content that will ultimately drive insights. And that’s probably the only reason LinkedIn managed to get Microsoft to pay 9 times. Clearly, data is the new gold 🙂
As you rightly said, Microsoft has been selling technology to CIOs forever. I am wondering how will Microsoft get its Sales team to sell marketing to CMOs and CSOs?
Now that’s a million dollar question and the one that I’m certain is giving Satya sleepless nights. Despite the fact that LinkedIn will continue as a separate company, it can be well expected that Microsoft will use its salesforce to sell LinkedIn solutions. While the original LinkedIn sales team will do their bit to train Microsoft account managers, the latter will have to onboard a new sales approach, team and may be even explore newer channel partners. Else, this will take only longer for them to monetise.
Hi Sanchit, brilliant insights thanks for sharing. You mentioned how LinkedIn’s recruitment solution is not a natural fit for Microsoft right now. Do you think Microsoft will let this space be for now or will they invest and enter the HCM market?
Hey Alicia, thanks for chiming in! Well spotted there – LinkedIn’s recruitment solution is not an obvious fit but there’s always a work around. Having said that, such efforts take investment in time and resources and most importantly a clear intent from the top to see them through. If Microsoft wishes to enter the HCM market it will clearly face a tough battle from vendors like SAP, Oracle, Ramco, Cornerstone OnDemand among others. Hence the need for clear intent from the top to stay put.
In an earlier post by you (dated 02 June 2016), it is mentioned that Linkedin is looking at buying Indian start-ups. Would Linkedin acquisition affect those plans now? Please explain how?
Thanks for stopping by Karen. Your observation is very apt and not something that many are yet to spot 🙂 Critical to remember that Satya has indicated that LinkedIn will continue to operate as a separate company and hence LinkedIn should reserve the right to suggest (if not pay for) startups that they believe will add substantial value. Having said that it’s also worthy to note that Microsoft is themselves on the lookout for such opportunities so don’t honestly think acquiring startups is falling off the agenda for both parties.
Is the Price of this acquisition largely influenced by the huge amount of Data that Linkedin has?
Because, only 30% of LinkedIn’s revenue (USD 1 billion) has a direct correlation and impact on Microsoft product portfolio currently. (Quoted by you)
Ito San, thank you for your comment. As my colleague Sanchit said in his above comment: Data is Gold! While the numbers of users which Microsoft gains from this acquisition is tangible (433 mn across 200 countries), valuations are not calculated in direct proportion to this number alone. This pool of available user data can be further mined extensively by brands to market and sell better and grow their revenue sizeably. IMHO the valuation of this deal is not directly related to the number of users and current accrued revenue. Rather, the co-relation here is tangential and based on the potential user insights and potential revenue.
This is very detailed research with a deep chronological perspective. It’s also interesting to understand how LinkedIn’s offerings will be integrated in Microsoft’s product portfolio. Microsoft has a history of buying companies (and products) and then turning these into flagship products. The MS-DOS operating system, Outlook Mail and Excel are examples. But it also had many failures (Nokia, Navision etc).
So I am hoping that Microsoft does not spoil a good thing (LinkedIn) and turn it into a dead asset.
–Brian Pereira
Hi Brian, thank you for your comments. As you rightly said, Microsoft has had its share of success and failures with acquisitions (more failures than successes off late). Their last successful acquisition was 1997! For the LinkedIn acquisition to become successful, what Microsoft needs is Strategy from the top, backed by execution (read thorough execution) at the ground level. IMHO it’s also imperative that Microsoft keeps the spirit of LinkedIn (professional networking) intact and accentuates it further. This will help retain and grow the combined user base.