Six years ago, Microsoft bought Linkedin for $26 billion;  Deserves all the effort?

Six years ago, Microsoft bought Linkedin for $26 billion; Deserves all the effort?

In February 2014, Satya Nadella was announced as the new CEO of Microsoft. The company was run until 2000 by its founder and majority shareholder, Bill Gates, and later by Steve Ballmer – who, despite not being a founder, had such stature, according to Nadella himself. It was an important turnaround for the tech giant.

Ballmer made a number of mistakes, from underestimating the advent of smartphones to misguided attempts to enter the hardware production space outside the company. The last mistake was costly both financially and to the company’s reputation. Ballmer bought Finland’s Nokia for nearly $8 billion before handing over the job, an acquisition that was cut to zero on the company’s balance sheet less than two years later.

When Nadella announced the purchase of LinkedIn, a social network for professionals, in 2016 for more than $26 billion, the move was frowned upon by many investors and analysts. Microsoft’s disastrous record with mergers and acquisitions contributed to this of course. Moreover, the newly appointed CEO remains suspicious of many players in the market. The possibility that, in addition to addressing Microsoft’s core problems, it would have to absorb and integrate an acquisition of this magnitude was exactly the point of question, in our opinion.

Nadella also chose LinkedIn because it has two key CEOs: Reed Hoffman and Jeff Weiner. The former co-founded and served as Chairman of the company’s board of directors, in addition to his extensive and successful career in Silicon Valley – he even co-founded Paypal, first as a board member and then as COO.

Hoffman was, and still is, a well-respected name in the tech industry, and his closeness with Nadella, especially with his joining the Microsoft board of directors, was an endorsement of the management of the then-new CEO of Microsoft.

The second, Jeff Weiner, was the CEO of LinkedIn. The CEO worked at Yahoo in the early 2000s, and in 2008 joined the company as interim president. He, along with Hoffmann, was responsible for turning the company from 338 employees in 2008 to 10,000 in 2016. The membership base has expanded from 38 million to over 433 million in the same period.

Nadella realized that the best way to extract value from this purchase was to allow Wainer and Hoffman to continue the work they were already doing well, this time with full financial and technical support from Microsoft.

This model appears to be working. Under Wainer’s leadership and oversight by Nadella and Microsoft, LinkedIn has gained a broad impact reflected in revenue generation.

Wainer, in 2020, transferred the CEO role to Ryan Roslansky, an 11-year in-house veteran, taking on the role chief executive officer. Despite the impressive revenue growth trajectory, the platform is still not making a profit, a challenge that now falls to Roslansky. And this is where being under the Microsoft umbrella comes in very handy.

Generating cash and profits from other company divisions, which are much larger, more than support the overall level of profitability. This then allows for continued investment in LinkedIn even though there is no profit.

The network has the following ways of generating revenue: (i) selling subscriptions (Premium subscriptions); (ii) selling space on the platform to advertisers (marketing solutions); (3) Recruitment Services (Talent Solutions).

At the same time, the company generates revenue through two other divisions: (4) Learning Solutions (formerly part of Talent Solutions): an educational platform that offers courses that can be added to user profiles; (5) Sales solutions (previously part of Premium subscriptions), tools for salespeople to communicate and thus increase their sales.

Microsoft does not provide revenue numbers through the LinkedIn product. Therefore, we cannot accurately determine the monetization of each user of the platform via ads. But we can estimate it: With data from 2016 – when the company was operating independently – LinkedIn generated about 18% of its total revenue via its Marketing Solutions division.

Another 17% came from premium subscriptions (which included the sales solutions segment) and the remaining 65% was attributed to the talent solutions segment (which included the learning solutions segment).

We know that in the third quarter of fiscal year 2021, which ended in April 2021, the advertising division generated more than $3 billion in revenue over the past 12 months, Nadella said in a quarterly earnings call. Revenue grew 60% in this period, and as a percentage of the total, it represented 32%. This number, at the time, made the company’s advertising business larger than peers such as Snap and Pinterest.

Assuming that this percentage goes up to about 35% – which is reasonable, as this was a faster-growing division than other divisions – we would have that LinkedIn’s advertising business revenue today is close to $5 billion, at $4.44 billion (35% of $13.8). billion dollars for the fourth quarter of fiscal year 2022).

As a result, we have a revenue component – from advertising – per user that is significantly lower than its peers, as shown in the table below with our estimates:

Increasing the number of users is important and the company has invested heavily in this. Today it has nearly double the number of members since it joined Microsoft. Now, they need to address their base’s low monetization and improve their competitive position in the ad space to move toward profit.

It’s important to keep in mind that having LinkedIn in your ecosystem goes beyond just having a social network that generates revenue and, ultimately, profit for Microsoft. It is about consolidating its position as a provider of a full range of services to professional organizations.

While running a company that collects data from more than 850 million professionals around the world, Microsoft is able to glean insights to better serve its customers, improve its tools and, ultimately, become indispensable to the organizations it serves. Nadella was clear when he took over as CEO: “Microsoft’s goal is to empower every person and organization to do more.” LinkedIn has proven to be critical to achieving this goal – even if it’s not currently a source of money.

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