Unpacking Microsoft’s Acquisition Of LinkedIn
The first notification which caught my bleary eyes Monday morning — Microsoft to acquire LinkedIn for $26 billion. Much has been written about why this may make sense for Microsoft.
What’s less clear is: What motivated LinkedIn to take this path? I’ll attempt to answer this at the end.
In my short time in they Valley, most M&A shockwaves include a large incumbent (like Microsoft) buying a small or scaling private startup (like LinkedIn buying Slideshare, or GM buying Cruise, or Google acquiring Nest, or Facebook buying Instagram or Whatsapp). In the time I’ve been here, the size of these and other outlier exits have been huge. Yuge! Unprecedented, even, and all driven by different motivations — incumbents scrambling for talent, quelling threats, or chasing the innovation frontier.
No matter the motive, the flood of liquidity unleashed by these seismic events helps keep the Valley’s startup engine humming, especially in an era when public market offerings are (for whatever reason) less desirable. We have been taught that “going the distance” in entrepreneurship is what the journey is about, to keep going as long as possible, up to the very end — to never give up. In the context of money, however, “going the distance” can often be code for “go public and let’s drive a big exit.” There’s nothing wrong with that, but the mentality changes a bit once a company graduates from startup to scaling giant to public company. Does a startup still need to keep going the distance once it’s public?
LinkedIn was one of the first in its era to go public and pave the way for its brethren Facebook, Twitter, and others to take on Wall Street road shows. Since then, as we all know, the company would, from time to time, report good quarterly earnings, but everyone in the Valley understood the product evolution and experience for LinkedIn not only didn’t improve, it devolved. There was little to no product innovation. There were Facebook-like misses on the transition to mobile, but no Facebook-like turnaround to get things right. As it went public with a bit over 100M members in the LinkedIn network, the company’s room to grow in the developed and developing world was potentially huge. It was the ultimate “data moat” company. We may not have liked the UI, but we all needed an online resume.
So, in steps the new Microsoft. Satya Nadella has proven himself in a few years at CEO to be forward-thinking, to push his company toward the dominant mobile platform (iOS), to snatch up good mobile product startups to help modernize the office suite (Accompli, Sunrise, Wunderlist, etc.), and to creep into the frontier with moves like the $2 billion purchase of Minecraft. With so much cash on hand and a mandate for change, Nadella is playing his own game of chess to help bring Microsoft into the 21st Century, to inject it with new talent, to fortify their position in mobile, and — with this latest move — to build an outpost right in Silicon Vally and get into the professional/work graph.
But, why did LinkedIn go for the sale? Why not continue to go the distance, in Valley parlance?
We may hear press release tidbits like the company is going to operate independently in Mountain View, or that the hooks into Outlook and LinkedIn will be good for users and customers, etc.
I have a slightly different view:
1/ Talent Drain: Outside of a huge acquisition, could LinkedIn have reinvigorated its ranks with new product talent to tackle head on all the product debt accumulated over the years? Talented operators want to work at Uber, Slack, and so on. It’s not clear they had the right horsepower to handle the road ahead — let alone deep linking on mobile.
2/ Product Stasis: As a result, the product became brittle and stale. Attempts to infuse it with a newsfeed or expert content didn’t produce fruit.
3/ Fragmentation of Professional Identity: The next generations of talent, in various industries, are building their reputations in non-traditional ways, through varied experiences, and don’t (yet) feel they need to go to LinkedIn or give it all of their data.
4/ Company Leadership: Much has been written and studied about founder-controlled/led companies versus those run by a professional CEO. In this case, the CEO at the time of acquisition was a professional brought in to lead the company through IPO, and while a founder was still the Chairman, one has to wonder if he weighed the choices of going back to CEO versus selling the company. It likely means the CEO, Chair, and BoD didn’t have the desire to keep going. It’s worth noting this given the cultural history above. Things end and that’s OK.
5/ Private Equity vs Acquisition: As a technical footnote, one also has to wonder if the company considered private equity as an option, though this would be a large transaction and would still result in a loss of control. By going for M&A, all cash, LinkedIn realized they’d stay around a $15-20B public company so engineering this offer would be the best they could get from any route. (Additionally, thanks to Dirk de Kok on Twitter, some outlets reporting LinkedIn had been issuing stock-based compensation at a rate that was too fast given the company’s overall slowing growth. This may have created an extra liability for the company that would’ve depressed the valuation further as accounting rules caught up with them.)
Meaningful exits of any kind in startups are rare. They often get reported when they occur, and there are so many startups and news sites to cover them, so it appears to be more common than they really are. And, while I believe LinkedIn’s move here was to package this up for another exit and stop the current journey, engineering this outcome to be so quiet and all cash was a masterstroke of strategic genius. It’s hard to imagine a $15B LinkedIn scaling again, or capturing the imagination of the next generation or even folks in the Valley.
[Quick Aside: LinkedIn is a very successful company for many constituents and shareholders. Yes, it didn’t realize it’s full potential (yet?), but by all economic measures and odds, it is an outlier. And, despite that, they opted to sell the company and give up the fight as a public entity. This may be a harbinger of sorts for other private tech companies which are valiantly trying to go the distance and become public. As we know already in 2016, it’s set up to be the lowest number of IPOs in any year. For a while, public markets valued LinkedIn almost at $50B, then slashed them to around $15B in Q1 ’16, and the private M&A market valued them at a 47% premium to the public market. If LinkedIn couldn’t draw and keep the leadership and talent needed, what shall we expect from other companies which will never even reach the $10B market cap zone? Will public markets really care about owning stocks in any companies that aren’t FANGAM or licking their chops for forthcoming outliers like Uber, Airbnb, Snapchat, and Slack? Right now, it seems doubtful, and the reality of this dislocation between public prices and private M&A will likely be the last hope for exit for many companies.]
Instead of trying to right the ship on its own, LinkedIn taking $26B cash to give up all control is a great deal for the company, shareholders, and employees. I would go so far as to say it is a fantastic display of stewardship for the company’s shareholders in working this deal to maximize a return and put an end to their current struggle. LinkedIn is lucky because the road ahead would’ve likely been boring or even bumpier than they experienced this past January.
It is also symbolic, in a way, that we mark and acknowledge the reality that the mantra “going the distance” isn’t always supposed to be a never-ending path — there are very, very few companies which can thrive for decades, and even some of the greatest economic outcomes (like LinkedIn) ride off into the sunset. Or, as Neil Young might have sang, “It’s better to cash out — than to fade away.”