With LinkedIn Acquisition, Microsoft Shot Itself in the Foot... Again

I thought LinkedIn (LNKD) was overvalued a week ago when it was trading in the $130-$140 range. Yet Microsoft (MSFT), a company that has a record of making terrible acquisitions, decided to pay a 50% premium to acquire LinkedIn. The deal is valued at over $26 billion, and I can’t wrap my head around why Microsoft, and Satya Nadella in particular, decided to pay such a premium to acquire LinkedIn.

According to the Harvard Business Review, “M&A is a mug’s game, in which typically 70%–90% of acquisitions are abysmal failures.”  Evidently, the chances of an acquisition being a success are low as it is, and the 50% premium just makes the Microsoft’s coup look terrible.

In addition, Microsoft’s track record of buying overvalued companies.
The company has wasted billions of dollars on acquisitions like Skype and Nokia that have eventually turned out to be complete disasters. I can see the LinkedIn acquisition being a failure down the road as well.

Granted Microsoft is a cash rich company and it can take a few risks in order to kick start growth. However, going by the company’s track record, it is evident that the company doesn’t take calculated risks, and instead overspends billions to enter a segment it does not completely understand.

To put this into perspective, the $26.2 billion price values LinkedIn at about 56x forward earnings. By comparison, Facebook’s (FB) forward earnings multiple is under 33. Facebook is clearly a much better run company than LinkedIn. Not only is Facebook growing at a strong pace, the company is also profitable as opposed to LinkedIn, which has a bad track record of profitability.

In addition, LinkedIn’s sales are expected to grow by 24.5% and 20% in FY2016 and FY2017, respectively, as opposed to Facebook which is expected to report 45% and 33% growth in the reference time period. Thus, I can’t see any reason why Microsoft decided to pay a 50% premium to buy LinkedIn. LinkedIn’s growth will eventually slow down, making it impossible to make sense of the acquisition. The companies do have some synergies, but that still doesn’t justify the price tag.


The acquisition was a blessing for LinkedIn investors and longs should probably look to exit the stock as soon as possible. LinkedIn’s shares could possibly fall to the same $120-$130 range if the deal doesn’t close by year-end. As for Microsoft, the company has continued wasting shareholders’ money and this acquisition will be another failure.
Published on Jun 17, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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