LinkedIn's "re-founding moment" is a $26.2 billion gamble for Microsoft

Profile picture for user slauchlan By Stuart Lauchlan June 13, 2016
Summary:
Microsoft's paying $26.2 billion for LinkedIn. It's all about building the economic graph of the digital world apparently.

weiner nadella
Weiner and Nadella

Yesterday Microsoft bought my LinkedIn details for about $60. Or put it another way, they bought 430 million people’s LinkedIn details for an astonishing $26.2 billion.

That’s for a company which reported full year revenues of around $3 billion, but turned in a net loss of $166 million. There’s been little realistic sign of recovery since the firm’s share price collapsed by 43% in February this year. Yesterday LinkedIn stock was up 49% on the news of the acquisition.

It’s the biggest ever purchase by Microsoft, the size of which might set a few alarm bells ringing. Redmond’s track record on big ticket acquisitions is far from spotless. Nokia, anyone? Yammer? Skype even? Yesterday Microsoft stock was down 5% on the news of the acquisition.

For his part, Microsoft CEO Satya Nadella was out to justify the big ticket price when he spoke to analysts, explaining his acquisition methodology:

First is this an asset that will expand our opportunity specifically, does it expand our total addressable market? Is this an asset that's riding the secular technology trend and is this core to who we're and our core mission as well as sense of purpose and structural position and when I look at those three dimensions LinkedIn really checks all the boxes.

How so? Well, it all starts with the underlying mission-statement for both firms, he argued:

When we talk about Microsoft mission and we talk about empowering every person and every organization on the planet to achieve more, there is no better way to really realize that mission than to connect the world's professionals to make them more productive and successful. That's really what this merger and this acquisition is about.

Great emphasis was placed on the idea that LinkedIn will operate as a standalone business with its own culture and still headed up its CEO Jeff Weiner. But Nadella was also keen to position how LinkedIn’s assets can be positioned alongside Office 365 and Dynamics, arguing that the total addressable market goes up 58%:

You should think about how Dynamics, for example, gets enhanced with LinkedIn Recruiter; how Dynamics gets enhanced with Sales Navigator and social selling; how you can take some of the learning solutions of LinkedIn and then build out the full learning management solutions;  the marketing solutions that LinkedIn has and our distribution ; and then, of course, not to forget Office 365 usage, which is at the core of Microsoft and the LinkedIn usage.

He added:

It's not just about CRM, but it's CRM with social selling, it's not just about HCM, it is HCM with talent management solutions in recruiting from LinkedIn. Those to me are the transformative things that we can now do.

Change the world

Then there’s the ‘change-the-world' vision. Nadella stated:

What we have at Microsoft today is what we refer to as the Microsoft graph where people and their relationships, their calendars, their work artefacts, their projects as well as what's inside a business systems whether it be leads and prospects all of that is connected as one information graph. And of course LinkedIn has a similar graph. It is about the professional network, it's about you, your job history, your skills, the people you know in your profession and if you connect these two graphs that's when the magic starts to happen in terms of how digital work gets completed. We really can transform the life of professionals in terms of completing it.

Where this is heading is towards the creation of what Weiner calls the world’s first economic graph, AKA a digital mapping of the global economy:

The economic graph envisions a profile on LinkedIn for every one of the three billion members of the global workforce. A digital representation for every company in the world, somewhere in the order between 60 and 70 million companies when you include small medium sized businesses, a digital representation for every one of their job availabilities made possible by those companies on the order of 20 million plus.

Add to this a digital profile for every university or higher educational body and a publishing platform, stir it all up and then:

Take a step back and allow capital, all forms of capital, intellectual capital, working capital and human capital to flow to work invest, deleveraged and in so doing help transform and lift the global economy.

In practical terms, Nadella and Weiner outlined some use case scenarios, based around LinkedIn as “the social fabric across all of Microsoft”, whether you’re using Outlook, Excel, PowerPoint, whatever. These include:

  • Looking up a contact in Active Directory and being able to get at all the information in their professional social network at the same time.
  • The LinkedIn news feed being augmented by AI and machine-learning tech from Microsoft.
  • Cortana’s use as a digital perrsonal assistant who can tell you all about the person you’re about to meet based on their LinkedIn profile.
  • A sales person being able to tap into greater understanding of who a sales prospect is.
  • Providing educational and learning capabilities to a wider audience.

All of this does raise some interesting questions about what information users are now going to be comfortable having open to air on LinkedIn. Nadella was quick to argue that this will be a matter of customer choice and opt-in with public and private networks being clearly delineated:

The key here is that we keep these two worlds separated because there's public information and there's tenant information, which is the customer's own data, and nothing gets linked, nothing gets connected, without customers opting in, without provisioning of IT principles around it. So in other words, customers decide what to connect. We believe customers will connect these because of the value it generates for them. But even when it generates that value it's their data, it is their insights. So we are very, very clear and very, very principled about how we will approach security.

My take

According to Weiner, this is a “re-founding moment” for LinkedIn. Well, yes, you can see this from his perspective. The ad business has been slowing down, the stock price was down the pan and there was growing suspicion about the growth prospects for LinkedIn.

In one bound, all those worries are lifted from his shoulders and he, and founder Reid Hoffman, have a ton of cash in the process. If this works, then it’s a “re-founding moment”; if it doesn’t, well it’s another Microsoft acquisition screw-up and Nadella will be the one to carry the blame.

For Microsoft, the allure of LinkedIn is obvious at a time when the company is re-inventing itself as an online business services provider. LinkedIn’s audience isn’t as big as Facebook or Twitter, but it’s potentially a far more valuable one - quality over quantity.

One important factor now will be whether those users are ready to stick with LinkedIn under Microsoft stewardship. The suspicion with which many approach Facebook and Google’s acquisition, retention and use of personal data, hasn’t been mirrored at LinkedIn to date. But asking if you trust LinkedIn with your data might be a very different proposition to asking if you want to trust Microsoft with it, even if such a question comes from an emotional rather than a rational chain of thought. 

Nadella went out of his way to emphasize that LinkedIn will be managed in a very different way to other parts of the Microsoft empire, hands-off being the order of the day. But at the same time, the messaging on the post-announcement analysts call was all about how great the opportunities are on the back of synergies and bringing the two firms offerings closer and closer together. That’s a circle that needs squaring in terms of the corporate story around this deal.

Yesterday most of the emphasis was on the size of the deal price. It is a mighty amount to pay, but indicative of the potential value that Nadella sees in those synergies mentioned above. He’s clearly ready to pay out if he sees a strong prospect. Bear in mind it’s only a year or so since he was ready to pony up $55 billion for Salesforce.

Whether he’s right in this gamble remains to be seen. (But I've more faith in his ability to execute on this than I would have had in his predecessor!) What will be interesting now will be to see the reaction to this move by the likes of Oracle, SAP and Salesforce, all of whom have been Facebook-centric personal profile data to date (although Salesforce’s Jigsaw acquisition was built around corporate data).