Ms Linkedin

Image source: Microsoft.

Microsoft (NASDAQ:MSFT) and LinkedIn (NYSE:LNKD) announced one of the biggest deals in history on Monday: Microsoft is acquiring LinkedIn for $196 per share in an all-cash transaction valued at a staggering $26.2 billion. This is a bold and risky decision, and these kinds of deals are seldom easy from an operational point of view. Nevertheless, it looks like Microsoft is making a remarkably smart move.

A promising business

Microsoft is paying a fairly expensive price for LinkedIn, and implementation is absolutely crucial. Even if the deal makes sense from a strategic point of view, integrating different companies with dissimilar cultures and business models can be quite challenging. 

Microsoft paid $7.2 billion for Nokia's phone business in 2014, and things didn't work out as expected for the company, as it had to book massive writedowns and fire thousands of Nokia employees in the following years. However, this deal makes much more sense than the failed Nokia purchase.

To begin with, LinkedIn is a promising business on its own merits. The company is the undisputed leader in online human resources and professional contacts, LinkedIn reported 433 million registered users as of the first quarter of 2016, a vigorous increase of 19% year over year. Member page views grew 34%, so engagement trends look quite healthy, and revenue during the quarter jumped by 35%, to $861 million.

LinkedIn is a textbook example of a company benefiting from the network effect. Individual users and companies searching for job candidates attract each other to the leading platform in the business, and the service becomes more valuable to both parties as the network gains size over time. This creates a self-sustaining cycle of growth and increasing customer value.

Stronger together

In addition, Microsoft and LinkedIn are stronger together. Microsoft is a top player in the professional cloud business, and there are evident synergies in integrating the leading professional cloud and the main professional network in the world. 

Captura De Pantalla

Image source: Microsoft.

Microsoft wants LinkedIn to be a unified professional profile surfed by applications such as Outlook, Skype, and Office. In the words of Microsoft CEO Satya Nadella, in an email to employees explaining the reasons behind the acquisition. 

Along with the new growth in our Office 365 commercial and Dynamics businesses this deal is key to our bold ambition to reinvent productivity and business processes. Think about it: How people find jobs, build skills, sell, market and get work done and ultimately find success requires a connected professional world. It requires a vibrant network that brings together a professional's information in LinkedIn's public network with the information in Office 365 and Dynamics. This combination will make it possible for new experiences such as a LinkedIn newsfeed that serves up articles based on the project you are working on and Office suggesting an expert to connect with via LinkedIn to help with a task you're trying to complete. As these experiences get more intelligent and delightful, the LinkedIn and Office 365 engagement will grow. And in turn, new opportunities will be created for monetization through individual and organization subscriptions and targeted advertising.

LinkedIn could do wonders for Microsoft in key areas such as Customer Relationship Management (CRM). The professional network has its own CRM product called Sales Navigator, and social selling is a major trend in the industry, so capitalizing on LinkedIn's social graph could make both companies much more powerful in this business.

Microsoft's digital assistant Cortana also has a lot to gain from this acquisition. Cortana currently uses information about the user, the company where it works, and all kinds of external information sources including aspects like weather and traffic data. By integrating information from LinkedIn, Cortana will now also have access to the user's professional network, and this could be a major game-changer in terms of the quality of information Cortana can provide.  

Captura De Pantalla

Image source: Microsoft.

According to a public presentation released by Microsoft, Linkedin has an estimated addressable market worth $115 billion, while Microsoft's productivity and business segment has a total addressable market of $200 billion. With this deal, Microsoft and LinkedIn would benefit from a huge market opportunity worth nearly $315 billion. It's not just about the size of the market, though, LinkedIn and Microsoft together are better positioned to create value for consumers and effectively capitalize on those market opportunities.

Andrés Cardenal owns shares of LinkedIn. The Motley Fool owns shares of and recommends LinkedIn. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.