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Technology specialist James Gautrey questions whether Microsoft will be able to breathe new life into LinkedIn should the $28 billion deal go through.

06/15/2016

James Gautrey

James Gautrey

Portfolio Manager Global and International Equities

From a financial point of view, the $28 billion that Microsoft has announced it wants to buy LinkedIn for doesn’t make an awful lot of difference to Microsoft. It only equates to around one year’s worth of free cashflow. Microsoft has a very strong balance sheet, so financially it doesn’t really move the needle on that front.

Operationally, Microsoft has a lot to do to fix LinkedIn. It is a good asset; it has a lot of interesting data on the world’s professionals but it has probably been mismanaged in the last few years.

Profits have not grown as sharply as investors would have hoped, and cashflows have been pretty low. In the last 12 months LinkedIn generated about $250 million, so Microsoft is in effect playing over 100 times the trading free cashflow.

The strategic fit and rationale for this deal is all about whether Microsoft can fix the firm through convincing the private, functionality-driven users of Office and Windows to pair up their license with the public social network-driven aspect of LinkedIn.

Microsoft gave a few examples of how it might achieve this, but they look quite questionable in my opinion. Getting that part right is the key for the whole deal, and also whether investors will trust Microsoft with capital allocation decisions in the future.