Since taking the reins from former CEO Steve Ballmer, Microsoft (NASDAQ:MSFT) CEO Satya Nadella has avoided many of the pitfalls suffered by his predecessor. One of his departures from Ballmer has been Nadella's antipathy for large-scale acquisitions, even reportedly successfully shooting down the idea of buying popular messaging app Slack. This is one change Microsoft investors can rally around: Ballmer's large-scale acquisitions (Nokia's phone business and aQuantive, among others) are mostly considered a waste of shareholder capital.
On Monday, June 4, Nadella reversed course on large-scale acquisitions, appearing with LinkedIn (NYSE:LNKD.DL) CEO Jeff Weiner to announce that Microsoft would be paying $26.2 billion for LinkedIn in an all-cash deal. On a per-share basis, the deal is for approximately $196 per share, nearly 50% above the prior day's closing. While that's a large premium above the prior day's trading price, LinkedIn was trading at this price a mere six months ago and spent most of 2015 above $200 per share.
Subsequent reports provide insight into the deal: According to Bloomberg Technology, LinkedIn initiated the buyout process, rather than Microsoft pushing for the acquisition. The New York Times' Andrew Ross Sorkin pointed to the heavy use of stock-based compensation as a reason for the acquisition. Here are the winners and losers in LinkedIn's recent stock-based compensation.
Stock options granted in 2015 appear worthless
Employees who received stock options during 2015 will most likely lose out as a result of this deal. In LinkedIn's annual report, the company reported granting 280,261 options during the year with a weighted-average exercise price of $259.47 per option. With Microsoft's accepted offer at $195 per share, even under the favorable assumption the options are fully vested in the event of acquisition, these options are still worthless. While there's no promise these options would have ever ended up being profitable, Microsoft's offer guarantees they will not.
However, overall, it appears many LinkedIn employees will make money from the stock-option program. LinkedIn's last quarterly statement puts the weighted-average exercise price of all options vested and expected to vest at $101.40. As of the date of LinkedIn's last filing, the company reported 2.46 million options, which means the worthless 2015 options are only 11% of the overall total.
There's better news for LinkedIn employees who purchased stock through the company's employee stock purchase plan (ESPP). During 2015, the company reported, employees purchased nearly 300,000 shares at an average exercise price of $166 per share. LinkedIn granted employees a discount equal to approximately 15% of the lower of opening-period or closing-period price. It appears these discounts allowed ESPP participants to profit nearly $30 per share on shares purchased in 2015.
A mixed bag for Lynda.com shareholders and RSU
In May 2015, LinkedIn used its then-high stock price to acquire online educational company Lynda.com in a $1.5 billion deal. Approximately 47% of the deal was financed with LinkedIn's stock. At that time, LinkedIn traded for $194.49 per share; the rest was mostly financed with cash. Overall, this was a large premium for investors in Lynda.com, which had received a $1.186 billion post-money valuation a few months prior.
The upside of the Microsoft all-cash buyout is ensuring that Lynda.com shareholders will receive the $1.5 billion value originally agreed upon. However, you couldn't blame Lynda.com employees for wondering what type of valuation they'd have if they'd remained a private company.
Another group of employees left holding a mixed bag are employees granted restricted stock units, or RSUs. During 2015, LinkedIn granted 3.9 million RSUs at a weighted-average fair value grant price of $243.33 per share. Unlike options, RSUs have value even if the price of the stock is below the fair value price, but are generally subject to income taxes, including FICA taxes, at the granted price at the time the RSU vests.
In Sorkin's article, RBC analyst Mark Mahaney alleges the high use of share-based compensation would have hurt the company in the event the stock price continued to trade at its current levels: "LinkedIn is among the most aggressive in using share-based compensation -- there is no question about that. If the stock had stayed down, it would have seen employee churn." If true, it's best for LinkedIn's employees and shareholders for the company to seek an acquirer rather to endure a revolving door of talent and collapsing valuation multiples as a result.