Why Is Microsoft Spending $26.2 Billion for LinkedIn?

Microsoft's announcement today that it is acquiring LinkedIn had many observers scratching their heads wondering how the company can justify shelling out $26.2 billion to bring the second largest social network into the fold. Executives at both companies now have to sell the deal to customers, partners and investors and convince them that the move will bring enough revenue and profit growth to justify the huge outlay in what will be Microsoft's largest acquisition to date.

Initial reaction to the deal was mixed. While some believe it can transform Microsoft in many ways, others pointed that most huge deals rarely live up to their promise. "There's no reason to believe the LinkedIn deal cannot work, I just think it may take a long time and it may not produce the earnings leverage Microsoft shareholders deserve for a $26 billion deal," said Roger McNamee,  a co-founder of Elevation Partners, to CNBC.

On a conference call with investors, Microsoft executives led by CEO Satya Nadella and LinkedIn CEO Jeff Weiner, described a vision that brings the LinkedIn experience into all components of Office 365 and Dynamics, as well as key tools ranging from Cortana, Azure Machine Learning and Active Directory with LinkedIn news feeds, courseware and profiles.

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

While LinkedIn will retain its separate brand and organizational structure, the two plan to deeply integrate their respective platforms in ways that aim to extend the usage of both companies' respective products and services. They spoke broadly about plans to tap into each other's respective artificial intelligence (AI) capabilities -- the Microsoft Graph and the LinkedIn Graph -- to create what Weiner described as an "economic graph."

"When you combine the Microsoft Graph with LinkedIn's professional graph, we think we are going to be able to take a very substantial leap forward in terms of the realization of our vision, which is creating economic opportunity for every member of the global work force," Weiner said. It focuses on providing digital representations for profiles, skills, hiring and learning, he said. "The goal is to step back and to allow all forms of capital -- intellectual capital, working capital and human capital to pull it where it can best be levered, and in so doing transform the global economy, he said. "We believe we will be better positioned to make this possible."

The idea is that by knowing what project a worker is engaged in can tap information from users' news feeds and activities of those in their social networks can improve workflows and provide better access to information, Nadella said. A Dynamics CRM user might be able to follow up on a lead or a customer meeting more effectively and user account information and Cortana might describe provide information about people a user is about to meet with, Nadella said.

McNamee stopped short of telling CNBC reporters that the acquisition will fail, but he emphasized his skepticism. "It's really simple, big deals don't work," he said. "These things are sold, not bought. From Microsoft's point of view, they have to pay attention to the fact that LinkedIn has never been a particularly profitable company, and their focus on job boards and hiring and all of that has shifted the value proposition in a way that I do thinks limits their ability to integrate it from Microsoft's enterprise suite. It's not to say they can't do it, it will take real work, and I think quite a lot of time."

Posted by Jeffrey Schwartz on 06/13/2016 at 2:32 PM