LinkedIn is a snowflake
When some people think of LinkedIn, they think of slow iteration, poor UX, spammy notifications, and a host of other weaknesses. Others regard it as a trailblazer in the social media space. I think of it as both 😁. Regardless, there’s a unique asset at the core of LinkedIn: true identity. Next to Facebook, LinkedIn is the biggest purveyor of our personal profiles (as opposed to dime-a-dozen pseudonymous/anonymous usernames), and that authenticity is something that’s scarce in the age of abundance. Those real user profiles are what Microsoft acquired…
The social networking tsunami has already washed ashore, swallowing not only as many users as it could, but also as much of their homescreen and as much of their timeshare as possible. That doesn’t mean there cannot be another, upstart social behemoth coming tomorrow. But, that does mean that incumbents have reached utility status — having already been embedded in the consumer experience. (The power of defaults and the friction of changing are formidable deterrents.)
More specifically, it’s hard to build another network wherein 400M users use their actual identities. Consumers already have Facebook for their personal profiles, plus LinkedIn for their professional. That’s the real social media duopoly — the twin pillars that pretty much have our social networking needs covered. While competitors can try to outflank FB/LNKD with niche solutions, it’ll be difficult for any rival to persuade new registrations to use their authentic identity and volunteer so much personal information on their profile pages.
Microsoft actually already has some kind of critical mass within Outlook, et al. That makes the LinkedIn tuck-in seem like a bit of a redundancy, but Microsoft’s preexisting enterprise applications are closed systems relative to LinkedIn’s open architecture: Outlook user profiles (e.g. corporate directories) live and die within intra-company silos. These profiles do not follow employees throughout their careers, do not stick with them across multiple employers, and therefore can not achieve utility status.
Furthermore, LinkedIn users volunteer their own profiles, and they’re structurally incentivized to add a lot of detail. A complete, accurate user profile is worth exponentially more than a partial one. Such data holism is Google’s competitive advantage, but even Google hasn’t completely cracked the social silo, which is slowly eating-away at its lead. In contrast, Snapchat has burst-onto the social scene, but it structurally has neither a “true identity” policy, nor holistic data. There are a lot of incredibly valuable, wide-moat apps in this space, but none with LinkedIn’s breadth and depth of market penetration. The combine entity has the market surrounded — approaching from both the consumer and enterprise fronts.
In sum, LinkedIn cannot easily be rivaled or replicated; its replacement cost is significant; there are very high barriers to entry; it is truly unique. Microsoft can take this in so many directions! (CRM anyone?)
That all establishes some material value for LinkedIn’s core assets. But, the next question is whether or not it’s worth $26.2B…
Listen, Microsoft has $106B in cash that’s giving it a zero ROA. Consensus has Microsoft growing EPS 8.25% over the long term, with an ROE ~14.4%, a forward earnings yield ~5.35%, and EBITDA yield ~10.35%. So, Microsoft’s cash represents a drag at 0% yield, hence, deploying that cash into an investment with some terminal value is worth-its-while.
Opportunity costs (i.e. the next best options) are what Microsoft really had to debate, so consider the whole LinkedIn package…
- LinkedIn’s growth:
Consensus 10.7% ROE (2017e), 27.34% long term EPS growth, ~4.2% EBITDA yield, $7B in revenue (2020e), and $2.3B in EBITDA (2020e).
- Strategic fit, synergies & complements
- Unique assets
As with all M&A, the realization of that value obviously depends on execution. It’s not just about how profitable the tuck-in will prove, but also when it’ll become accretive. Unfortunately, I have no opinion about that future value — other than to make light of the players’ spectacular rationale. I just couldn’t let such a momentous shift in the business/finance/tech landscape come-to-pass without distinction.
This is not your garden-variety acquisition. This is the story of a $400B “has-been”… that missed the boat on an entire epoch… that’s trying to stay relevant… with almost $94B in revenue… in the midst of a turnaround… acquiring something really special… something that has the potential to complete the comeback.
A new Gallup poll showed that 58% of Americans said the increase in news sources makes it harder to stay informed. Annotote is the antidote to your information overload. Choose one:
*Financial data from Thompson Reuters I/B/E/S