LinkedIn’s shares struggled in 2016, dropping steeply by 42.8% in early February to $109.97, before Microsoft announced it’s buying the social networking site offering $196 per share. Microsoft’s planned acquisition of LinkedIn is the tech giant’s largest purchase to date and the largest deal within the sector so far this year.
Microsoft’s, and by extension CEO Satya Nadella’s, decision to acquire the previously floundering professional network site is regarded by many as a bold move.
Ali Unwin, manager of Neptune Global Technology Fund, regards Nadella’s decision as a big bet to make when Microsoft is already occupied with a tricky – but so far broadly well-executed – shift to the cloud.
“Large M&A in the tech sector carries a lot of risk. We are surprised to see Nadella go for such a large deal when his tuck-ins (Minecraft, Accompli, Xamarin) have been well-received – investors are not calling for a transformative deal and this is the largest in Microsoft’s history,” he said.
While Unwin views the move as slightly risky, he does not disagree with Microsoft’s underlying strategy.
“This is more about Total Addressable Market expansion rather than buying a product to push out through Microsoft’s sales pipes,” he explained. “LinkedIn’s data is their strategic asset and it looks like Microsoft are beefing up their CRM products (Dynamics) to compete more aggressively with Salesforce. Companies are moving to more data-driven approaches to decision-making, and LinkedIn own one of the most strategic datasets there is.”
In the meantime, Unwin maintains a neutral stance on Microsoft shares.
“Although $26bn cash is a very large ticket size, the deal does not make much different to Microsoft’s financials,” he said. “We have no doubt some investors would have preferred that cash returned to them, but we still think Microsoft has an excellent position in productivity software and the potential for many years of strong growth in its emerging cloud businesses. I suspect most investors will give Mr Nadella the benefit of the doubt for now.”
Contrary to Unwin’s position, Carmignac fund manager David Older regards Microsoft’s purchase as a low risk deal.
“Even at a 50% premium, Microsoft bought LinkedIn at a significant discount ($196) to what it was trading at late in 2015 ($250). Also, Microsoft is buying a business with a tremendous moat around it – no one will challenge LinkedIn’s global professional network,”he said.
Older said Carmignac saw potential in LinkedIn when it was ‘the most hated tech stock,’ following the pummelling of its share price. The asset manager purchased $300m worth of shares for its Carmignac Investissement Fund in April and currently holds 0.9% of LinkedIn.
“Linkedin has incredible growth drivers,” Older remarked. “and has over 400 million users worldwide. We have been tracking user engagement since the company relaunched its mobile app last year, and have noticed much more user satisfaction and engagement. It is also continually adding successful new products to engage with users.”