U.S. stocks are starting the week off on the back foot, with the S&P 500 (SNPINDEX:^GSPC) and the Dow Jones Industrial Average (DJINDICES:^DJI) (DJINDICES: $INDU) down 0.38% and 0.33%, respectively, at 2:35 p.m. EDT. Shares of Microsoft Corporation are underperforming, down 2.40%, in what amounts to the market rapping the Redmond, Wash., software giant's fingers for announcing its largest-ever acquisition. Microsoft will pay $196 per share for professional networking service LinkedIn Corp in an all-cash transaction valued at $26.2 billion.
With LinkedIn, Microsoft CEO Satya Nadella takes the first step toward tarnishing his legacy
This column has only written positive articles on Microsoft CEO Satya Nadella (to the best of my memory), but all streaks must come to an end, I suppose. Today's announcement ought to be a source of real concern for Mr. Softie's shareholders, as Nadella appears set to add to the company's abysmal record of "largest-ever" acquisitions.
To wit: Less than a year ago, Microsoft announced it was writing down the value of the Nokia Devices and Services assets (Nokia's handset business) acquired for $9.4 billion by some $7.6 billion (or four-fifths of the acquisition price). The acquisition had closed not 14 months earlier, becoming Microsoft's largest acquisition.
Three years prior to that announcement, Microsoft disclosed a $6.2 billion writedown "mostly related to its 2007 aQuantive, Inc., acquisition." The price paid for the digital advertising company? Approximately $6 billion.
At the time, aQuantive was Microsoft's largest-ever acquisition. A month earlier, Google had acquired aQuantive competitor DoubleClick (a deal that has been a tremendous success, incidentally). Faced with that deal and a slew of others in the online advertising sector, Microsoft panicked and agreed to pay an 85% premium to aQuantive's share price -- in cash.
(The recent exception to these disasters appears to be the 2011 acquisition of Skype in 2011 for $8.5 billion.)
In this latest case, Microsoft is paying a 50% premium to LinkedIn's closing share price on Friday. On the face of it, the offer looks opportunistic -- LinkedIn's share price had collapsed, losing 42% this year and 52% relative to its Feb. 2015 all-time high of $270.76. But the plain truth of the matter is that although LinkedIn is a social network, it isn't Facebook and has therefore been unable to make good on the promise that fueled a highly optimistic valuation.
Despite this, though, the price Microsoft is paying doesn't look like any sort of bargain. As Bloomberg Gadfly columnist Brooke Sutherland pointed out this morning:
Microsoft is paying about 91 times LinkedIn's Ebitda in the past year, making it the priciest major deal of 2016 on that basis. Compared to the M&A bonanza of 2015, only two takeovers rated as more expensive and those involved makers of cancer drugs and rare-disease medicines.
Sutherland concludes that "sets a pretty high bar for the tech giant to prove it's worth it." "Insurmountable" is more like it.
Surprising fact of the day
Another milestone for the topsy-turvy post-financial crisis world: Bloomberg reported yesterday that Danes can now get a 30-year mortgage at a better rate than the one the U.S. government pays to borrow money over the same term. The yield on the 30-year U.S. Treasury bond was 2.45% at 10:40 a.m. this morning, according to data from Bloomberg.
Denmark has already recorded cases in which the interest payments on homeowners' mortgages are negative!