Do Microsoft's Reasons for Buying LinkedIn Make Sense?

Microsoft's (MSFT -1.27%) recent announcement that it is buying LinkedIn thrilled shareholders in the business-based social network, but it's also making a lot of investors scratch their heads in confusion.

In this clip from the Industry Focus: Tech podcast, Dylan Lewis and Daniel Sparks go over a few of the biggest stated reasons for the LinkedIn (LNKD.DL) buyout, both on the consumer-facing side and the enterprise side, and then talk about which reasons make the most business sense for Microsoft going forward.

A transcript follows the video.

This podcast was recorded on June 17, 2016. 

Dylan Lewis: I think a lot of people are thinking it: What are the compelling reasons for this acquisition? Some people are like, yeah, this totally makes sense. Some people are like, this is a total head-scratcher. I don't really see it. What do you see here, Daniel?

Daniel Sparks: Microsoft brought up that there were synergies and integrations that could be achieved through this. That is what I think is raising a lot of eyebrows. For instance, some of the synergies that they mentioned were integrating LinkedIn profiles into various Microsoft products such as Outlook or Office, so that when you're doing these collaborative efforts, you have context of who's there. This is an example where something like this could have been achieved easily through a win-win partnership. It doesn't seem like there needed to be a transaction for this to happen. But then, there's also integrations where it seems to make more sense, like when it comes to CRM, customer relationship management, LinkedIn and Microsoft have some commonalities there, some overlaps that could be complementary.

When it comes to synergies, I don't see this as a really compelling reason for the acquisition. But sure, maybe it works out, maybe it doesn't. That's really the approach that you have to use with a lot of acquisitions, just the fact is, many of them fail. But as far as compelling in the reason of LinkedIn as a solid business model in and of itself, I think that does make sense, because you have to keep in mind, even though the stock is being purchased at a 50% premium, it's also down significantly from its 52-week high, which was in the mid $200s. As far as it being a business in and of itself, I think that's a key compelling reason for this acquisition. Facebook (META -4.13%) has shown the longevity of the network effect, especially when it comes to social media business models. I think the network effect can be powerful there. LinkedIn is a successful business. Sure, they're still young and growing. But they don't have any key problems that make it look like it couldn't succeed in its own right.

So, that's the compelling thing I see there. LinkedIn is a solid business in and of itself.

Lewis: Yeah, it seems to me like the things that consumers are going to see from this deal, your everyday internet browser, doesn't really support the deal all that much. It's more on the enterprise side, the CRM side. I think Microsoft seems to see a lot of value in the navigator tool that LinkedIn has. You see them on the presentation in the press conference that they announced this deal on, talking about the integration of the news feed and using LinkedIn profiles within Outlook so you have a more robust understanding of who you're talking to, and it's like, man, that does sound like the kind of thing they could have achieved in a partnership. I don't know that that was something that needed a $26 billion price tag attached to it. But on the CRM side, maybe there's something more.

Sparks: Right, yeah. And Microsoft actually brought up that while this is a complementary acquisition, the huge focus here is that it's additive. You kind of see that when they brought up a slide of the addressable markets. Microsoft defines LinkedIn's addressable market as basically totally additive, which seems a little bullish and optimistic. So maybe we should raise our eyebrows on that one. They defined LinkedIn's market as $115 billion, where Microsoft is already at $200 billion. So, Microsoft sees this as a huge addition to their opportunities. That's one way we could think about it, too.

Lewis: Yeah, and the penetration for that market right now is in the single-digit percentage. I think their trailing 12-month revenue is somewhere in the neighborhood of $3 billion. 

Sparks: Exactly.

Lewis: There's certainly quite a bit to realize there, but I do agree, it's a little ambitious.