Quick Thoughts: MSFT-LNKD Big Obvious Synergies, Watch Out CRM

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MSFT is acquiring LNKD for $26B. We see substantial upside to the deal.

  • Obvious synergies – LNKD’s ecosystem of networked professionals and employers is a unique and highly valuable asset that becomes more valuable tied to MSFT. Its reach can be extended through integration with MSFT’s email, office collaboration, and ERP franchises. Monetization can be accelerated by MSFT’s global enterprise salesforce and its Bing ad sales platform. Costs can be reduced and performance improved by transitioning operations to MSFT’s data center platform.
  • Fixing LNKD – LNKD has struggled with driving engagement on its professional network. Posts on the site are viewed as excessively self-promotional and spammy, the user app is difficult to navigate, and tools to build and nurture the peer-to-peer professional networking to which the company aspires are inadequate. Fewer than 25% of registered users visit at least monthly, a stat that needs to improve – users must keep their professional information up to date for the talent solutions business to maintain its value. LNKD has also had some issues with cybersecurity in the past. We believe that all of these problems may be more effectively addressed under MSFT, which brings considerable resources and perhaps, the financial cover needed to complete the job.
  • Watch out CRM – The big opportunity is combining LNKD’s social information on professionals to MSFT’s Dynamics CRM system, adding a potent tool for identifying sales opportunities and strategies for opening accounts. So called “social selling” could allow Dynamics to challenge CRM with functionality that would be very difficult for the market leader to replicate. LNKD could also be a cornerstone for a more comprehensive set of HR solutions and accelerate MSFT’s aspirations for workplace collaboration solutions. MSFT would also be a considerable boon to LNKD’s professional education initiative, greatly extending its potential reach.
  • Combining MSFT AI with LNKD data – MSFT has one of the most advanced deep learning AI programs in the world. LNKD has a substantial and unique database of professional qualifications, demographics and connections for more than 400M users.  Together, they should be able to generate extraordinary insights into areas, like ideal hiring profiles, high performance team dynamics, optimal career paths, patterns of employee leadership, effective social sales strategies, etc., that can greatly improve existing products and form the basis for new ones.
  • Accretion by CY18 is possible – The $196/share price is 46x consensus 2017 EPS of $4.26. We believe that LNKD was likely to beat that number by 10%+ on its own, and that immediate cost and revenue synergies would likely yield additional upside. Still, given that MSFT trades at just 17.5x forward earnings, further synergies will be necessary for accretion. Management expects accretion by its FY19 (June) – we expect it as early as 1HFY19, potentially yielding neutral to accretive effect for CY18.
  • Read across for SaaS. This deal is threatening to CRM, strengthening MSFT’s sales management offerings in ways that it will be very difficult for the market leader to follow. We have long expected a major consolidation amongst SaaS application vendors – this could be an opening salvo that could see MSFT, CRM, ORCL, SAP and, perhaps, AMZN and GOOGL looking to build more comprehensive suites of enterprise cloud applications. If so, companies like WDAY, NOW, DATA, ZEN, and others could find themselves in play.
  • Read across for internet. This deal demonstrates the real value of large and unique data sets, a LNKD asset that we believe MSFT valued more highly than the market as it navigates its play in the emerging AI era. Likewise, other companies with large, unique data sets – like TWTR, NFLX, Pinterest, and others – could have more value to potential acquirers than to the market. Still, MSFT’s deal for LNKD does not make it more likely that these deals would occur.

 

Summary

MSFT’s $26B deal for LNKD is an excellent match of complementary assets and capabilities. MSFT’s leading edge cloud infrastructure and huge enterprise sales presence are obvious and immediate sources of synergy, driving cost reductions, capex efficiency and improved sales reach into enterprise organizations. We also believe that MSFT can address issues with LNKD’s app and user network design that have alienated some users and constrained engagement. The biggest opportunity from the deal is the addition of LNKD’s “social selling” capability to MSFT’s Dynamics CRM system, adding a unique and potent tool for identifying sales opportunities and strategies for opening accounts. We believe that this will quickly make MSFT a much more effective rival to market leader CRM. We also believe that MSFT’s strong deep learning AI program will generate extraordinary value from LKND’s extensive base of user data, informing “smart” applications across the enterprise. We believe the deal will be accretive before the end of CY18, with substantial value creation longer term.

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