When Microsoft and LinkedIn announced the acquisition on Monday, the Web literally exploded. Most publishers went with the articles that were either neutral or questioning of the deal. Bloggers and regular users were much less forgiving. Many voiced concerns that the price Microsoft had agreed to pay was unreasonably high, that Microsoft had had very little success integrating acquired businesses into the wider offering of their products before, or that combining LinkedIn social graph with Microsoft productivity tools would mean that the users would enjoy even less privacy. While most of these concerns could turn out true, I personally have a more positive outlook of this acquisition.
The Opportunities
Most M&A deals in tech can be broadly attributed to one of two distinct categories: product acquisitions and business acquisitions. In case of product acquisition, the acquirer is typically going after the product/technology, and the team behind it, with the ultimate goal of either strengthening some of its already existing products, or integrating this new product in their broad ecosystem, thus offering their customers additional services. In case of business acquisition, the objectives can be less obvious. As such deals typically happen at the later stages, the business of the company being acquired may already be successful on its own. This means that while the acquirer may still go after that company hoping to use it to strengthen its own business lines, it is also possible that the main goal is to use the vast resources of the parent company to help the company being acquired grow its own business further.
Most articles covering the acquisition of LinkedIn were primarily focused on the ways LinkedIn’s extensive userbase and social graph might be used to augment certain Microsoft products. While Microsoft indeed draws very significant revenues from a number of products that might benefit from the deeper integration with LinkedIn, many wondered (e.g. Peter Bright from Ars Technica http://arstechnica.com/information-technology/2016/06/nope-i-still-cant-make-sense-of-microsoft-buying-linkedin/) if it would make more sense for Microsoft to try and enter some form of extensive partnership with LinkedIn instead of going forward with multi-billion acquisition. This seems like a very legitimate concern. Yes, it would be great for Microsoft to have LinkedIn profiles integrated into its Office applications (namely, in Outlook), or to provide its customers with access to LinkedIn Sales Navigator from within it Dynamics CRM (not to mention rather cool possibilities that could arise from deep integration of Cortana with your main destination for professional networking), but is it really worth $26 billion?
Right now, though, everyone’s attention seems to be on how Microsoft can benefit from this acquisition, when in reality we should probably focus on how LinkedIn could benefit from getting access to Microsoft’s vast resources and huge customer base.
While having many differences from, say, Facebook, LinkedIn in its core is still a social network. To prosper, it needs basically two things: large and interconnected user base and tools to drive engagement as high as possible. The exact mechanics of monetizing this audience are somewhat less important — if you have huge audience and great engagement, you’ll find a way. Right now, LinkedIn already has a significant user base (though there is still potential for growth). What is needs to work on now is engagement. According to eMarketer data, in 2014 U.S.-based LinkedIn users averaged 9.8 minutes per day on the website (for comparison, Facebook users spent 42 minutes per day on the platform). Integrations with Office, Dynamics CRM and Cortana, if done right, can greatly benefit LinkedIn in terms of user engagement, as those will allow it to essentially lock-up the user in its broader ecosystem, enticing him to pay more attention to its profile and activities on the website, and return there again and again. Today, LinkedIn is still driving the majority of its revenues from its Talent Solutions division, but with increased engagement, it should be able to rejuvenate the growth of the revenues from its Marketing Solutions as well.
Another area where Microsoft might be a huge help to LinkedIn is Premium Solutions, and namely, premium subscriptions for LinkedIn users. Right now, those are (somewhat) overpriced for most users, and without having a premium subscription, significant amount of functionality remains unavailable, thus restraining the potential for engagement growth. For Microsoft, it might be less important to draw immediate revenues from this stream, plus the company might decide to bundle premium subscriptions with some of its other products (e.g. in a way OneDrive is bundled with Office subscription), thus reducing the burden of paying the full price for premium subscription for the users, inducing engagement growth and ultimately benefiting from it in the long run. The same might be true for Lynda — allowing more users to gain access to the platform at less cost might turn out to be beneficial for everyone.
Microsoft and LinkedIn has outlined some other pretty interesting opportunities in their presentation for investor call — you can find it there https://goo.gl/9mUvjL.
The Concerns
Of course, there is certain truth in the concerns voiced by many in the light of this deal. It is indeed possible that Microsoft won’t be able to properly integrate LinkedIn in its broader ecosystem. LinkedIn team might turn out to be less motivated now that they are about to receive exorbitrant amounts of money for the shares, as the acquisition is an all-cash deal (I actually wonder why Microsoft choose to pay in cash and not in stock, at least partially). The engagement levels might prove to be very hard to increase, with users unwilling to spend much more of their time on LinkedIn platform, no matter what integrations and additional functionality will come around.
In other words, a lot can happen — most M&A deals do turn out to be failures, and not always any party is at fault.
The Future
Still, I believe there is a lot of potential in LinkedIn becoming part of the broader Microsoft’s family, and really hope I’m not mistaken. Has Microsoft overpaid for LinkedIn? Most likely. But with no other LinkedIn to acquire on the horizon, it all comes down to what Microsoft and LinkedIn can do in the future together, and whether it would compensate for the high price paid for LinkedIn today. A lot of things can go wrong. But if done right, this partnership might bring a lot of good for both companies, as well as their users. Now we’ll just have to wait and see.