Software giant Microsoft (NASDAQ:MSFT) is now the official owner of professional network LinkedIn. The blockbuster $26.2 billion deal, announced in June, is Microsoft's largest acquisition ever by a large margin (the second-largest acquisition was Skype for $8.5 billion in 2011), and it makes plenty of sense on a strategic level, given both companies' comprehensive focus on the enterprise, productivity, and professionals. But Microsoft has a poor record when it comes to massive acquisitions. "Poor" might even be too generous; the software giant's track record is downright awful.
The two worst deals in recent memory were aQuantive ($6 billion) and Nokia's handset business ($7.2 billion), both of which resulted in massive impairments and writedowns as Microsoft failed to execute. The key distinction here is that most of Microsoft's failed acquisitions were made under Steve Ballmer, and Satya Nadella has now been CEO for over two-and-a-half years. Of course, Microsoft has made many acquisitions under Nadella (nearly three dozen), but most of those were fairly small and targeted. LinkedIn will be the biggest test on the acquisition front, and any success or failure to execute on the vision for LinkedIn will strongly reflect on Nadella's leadership record.
The bar for success will be high, given the price tag. I've said this before, but it's not just about what you buy, but also what you pay for it. By sheer virtue of the price, Microsoft will create a commensurately high level of risk should things go sideways.
The transaction will definitely increase Microsoft's goodwill by a meaningful amount. In accounting for goodwill, Microsoft will need to measure the fair value of acquired assets, which can potentially differ from the current carrying value on LinkedIn's balance sheet. It will also need to net out the fair value of liabilities that it's assuming, and it's worth noting that the $26.2 billion valuation is inclusive of cash acquired and refers to enterprise value, which includes the debt that Microsoft is buying. Fair value analyses are often conducted by third-party valuation companies.
At the end of September, LinkedIn had total assets of $7.55 billion, which includes $1.9 billion worth of goodwill and net intangibles from LinkedIn's own prior acquisitions, leaving roughly $5.65 billion of tangible assets. The professional network has total liabilities of $2.65 billion, including $1.2 billion worth of convertible senior notes. Netting that out results in about $3 billion in tangible assets being acquired. This is merely a starting point, and trying to actually calculate with any specificity how much goodwill Microsoft will end up recording is beyond the scope of this article. The point is that it will be a lot.
Microsoft was carrying $21.4 billion in goodwill and net intangibles at the end of last quarter.
The context for the high price is that LinkedIn was already publicly trading at fairly high multiples, as investors were pricing in long-term growth (40% plunge earlier this year notwithstanding). In fact, that earnings-related sell-off likely set the stage for this acquisition, as it made shares that much cheaper. Plus, there was the whole bidding war with salesforce.com, which reportedly kicked off the festivities around $160 to $165 per share. Microsoft ended up paying $196 per share.
LinkedIn has become a powerful force in professional networking, and it would be a shame if Microsoft somehow screwed it up. That's why it's encouraging that LinkedIn will still mostly operate independently, in order to maintain its strong brand and culture. For now, Nadella deserves the benefit of the doubt, as he has delivered handsome returns to shareholders so far thanks largely to executing on cross-platform strategies, something that was never possible under Ballmer. Let's hope he follows through with LinkedIn and puts an end to Microsoft's bad rap.