Windows Insider

Does Microsoft Deserve Benefit of the Doubt with LinkedIn Deal?

Even though Microsoft's large acquisition track record has been spotty, at best, the latest big buy could end in a huge win for the company.

• By Ed Bott
• 09/09/2016

In the past decade, Microsoft has made some high-ticket acquisitions that, in hindsight, were colossal failures.

Microsoft's first expensive deal was its 2007 acquisition of online ad agency aQuantive for nearly $6.3 billion. Five years later, the company wrote off almost all of that investment, taking a $6.2 billion charge for the "impairment of goodwill" from the failed deal.

Then there was the $9.5 billion purchase of Nokia's handset business in 2014, which led to another massive write down of nearly the entire deal, some $7.6 billion in all, less than two years later. Along with the financial losses came the layoffs of thousands of employees and the shutdown of the Lumia smartphone line.

And I'd be remiss if I didn't mention the one that got away: Back in 2008, then-CEO Steve Ballmer wanted to buy Yahoo! for nearly $45 billion. Fortunately for Microsoft shareholders, Yahoo! said no to the deal, by far the best it would ever see, leading to an eight-year decline culminating with Verizon's agreement to acquire Yahoo! Internet operations for $4.8 billion.

Given Microsoft's troubled history with some megadeals, this summer's agreement to acquire LinkedIn for $26.2 billion has to at least raise eyebrows. Why might this big deal succeed when others failed so spectacularly?

The answer lies in why Microsoft embarked upon those earlier deals.

The aQuantive acquisition was a direct attempt to compete with Google, which had just done its own megadeal a few months earlier, paying $3.1 billion for DoubleClick. Ballmer saw online advertising as a future growth opportunity and he desperately wanted to outdo Google.

The problem was that advertising wasn't a core business for Microsoft, and the acquisition of aQuantive was basically an attempt to buy an entrée into a category in which the team in Redmond had no experience. Google, on the other hand, was already a dominant advertising company, and DoubleClick was a natural fit.

Likewise, the Nokia acquisition was an attempt by Microsoft to muscle its way into a category in which it had little experience. Yes, Microsoft's hardware division had successfully sold plenty of keyboards and mice, but the nascent Surface division was struggling and about to write off nearly $1 billion on its Windows RT devices.

So what makes LinkedIn different?

For starters, its business is actually a solid fit with Microsoft's. Superficially, LinkedIn is a social network, but in reality its business is built on hiring, recruiting and networking. Where Facebook and Twitter bring in revenue from advertising, LinkedIn sells professional services to recruiters and charges its members for premium subscriptions that allow them to make valuable professional connections.

Draw a Venn diagram that includes users of Microsoft Office and LinkedIn's user base (the company claims more than 450 million members, across 200 countries and territories worldwide), and I suspect the overlap will be nearly perfect. The opportunity to include LinkedIn services as part of Office 365 seems like a natural fit.

In M&A-speak, the two companies have "strategic synergies."

If anything, the LinkedIn deal is similar to the $8.5 billion acquisition of Skype back in 2011. Five years later, Skype has expanded its footprint into Office 365, with the Skype for Business brand taking over for Lync as the default business communication software. Microsoft doesn't break out its revenues from Skype, but five years later there are no signs that any write downs are in the offing, and the consumer Skype has just released major upgrades for Windows 10.

Of course, the fact that LinkedIn and Microsoft are a good fit from a business point of view doesn't mean that the price was right, nor does it eliminate the headaches that come with integrating a large company (nearly 10,000 employees worldwide) into an even larger one.

But given CEO Satya Nadella's success in transforming Microsoft's business over the past few years, it's hard not to give this deal the benefit of the doubt.