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Microsoft (NASDAQ: MSFT) made huge news on Monday when the technology giant announced it would buy professional social networking company LinkedIn (NASDAQ: LNKD) for $196 per share. News of the LinkedIn buyout instantly vaulted LinkedIn stock nearly 50% higher, as Microsoft agreed to pay a significant premium to get the deal done.
The $26.2 billion LinkedIn buyout represents another step forward for Microsoft. Under CEO Satya Nadella, the company has made great strides in transitioning from a software company of old, one which was heavily reliant on the personal computer, to a nimbler player in the cloud.
Here’s what investors need to know about the biggest software deal ever.
Steep Price of LinkedIn Buyout
On the surface, Microsoft and LinkedIn are a curious combination. They don’t seem to have much in common when it comes to their business models. Microsoft sells software and video game hardware, while LinkedIn is focused on social media and professional networking.
But underneath the surface, the reason is clear: With the LinkedIn buyout, Microsoft is making a bigger push into enterprise software through social media.
Microsoft is paying a steep price for LinkedIn ̶ the $196 price tag represents nearly 10 times LinkedIn’s 2015 revenue ̶ but it has its eyes on growth. LinkedIn grew revenue by 35% last year, and management projects another 20% to 22% revenue growth in fiscal 2016.
LinkedIn ended last quarter with 433 million members. It dominates enterprise networking, an area in which Microsoft sees a great deal of potential. In a video press release, Nadella said, “Think about taking that and connecting with a professional network and having the entirety of your professional life be enhanced and empowered, where you are acquiring new skills in your current job and finding a greater bigger next job.”
Microsoft’s goal seems to be a much bigger presence in professional software and services, designed specifically for the enterprise customer. LinkedIn has a massive user base, and with Microsoft’s software prowess like Office 365, all the data derived from those members could be used to revolutionize workplace software and services.
Moreover, imagine training videos from Lynda.com, which LinkedIn purchased in 2015 for $1.5 billion, available inside Excel spreadsheets to directly offer help and training assistance.
Instead of using Office and LinkedIn separately, the combined entity would provide Microsoft with a great deal of scale. As it stands, workers have to split time between getting projects done, typically using one of Microsoft’s software products, and then accessing professional networks separately. Microsoft aims to sew those two pieces together.
Integration of professional cloud and professional networking should be smooth, which is why Microsoft sees the LinkedIn buyout as a huge growth opportunity.
This Isn’t Your Father’s Microsoft
The news of Microsoft’s LinkedIn buyout represents a watershed moment in Microsoft’s history. When Nadella first took the helm, it was hoped that he would steer Microsoft in a new direction than previous CEO Steve Ballmer, who many felt clung too long to PC-related products.
Indeed, Microsoft has a checkered history with large M&A deals. It purchased Nokia’s handset business for $9.5 billion, and four years ago acquired digital advertiser aQuantive. Microsoft eventually had to write off virtually the entire value of these deals.
As a result, investors have good reason to be skeptical of the LinkedIn buyout. But it is worth noting that those deals were pursued by Ballmer. Nadella clearly has a different vision. If this deal doesn’t convince investors how intently Nadella is pushing the company away from its old focus areas into higher-growth businesses, nothing will.
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