Acquired episode 14 focuses on Microsoft's acquisition of LinkedIn for $26.2 billion. Hosts Ben Gilbert and David Rosenthal discuss the history of LinkedIn, analyze the rationale behind the acquisition, and speculate on its potential impact.
LinkedIn was founded in 2002 by former PayPal employees, including Reid Hoffman, launching in May 2003. It quickly grew by "scraping" address books and spamming contacts. This aggressive tactic resulted in a lawsuit but proved effective in bootstrapping the network. In late 2003, Sequoia Capital led their series A. Sequoia would maintain a board seat for LinkedIn for its entire public life. In 2004 they raised their series B. The series B pitch deck emphasized LinkedIn as an unbiased source of truth about professionals, solving incentive problems that existed in traditional directories.
LinkedIn has three primary revenue streams: Talent Solutions (recruiter access), Marketing Solutions (ads), and Premium Subscriptions (access to broader networks). Talent Solutions is the dominant revenue driver, with recruiters paying significant amounts for access to the platform. The company went public in May 2011, pricing at $45 per share and closing its first day of trading at $94.25. In February 2016, the company announced disappointing guidance to Wall Street, its stock plummeted and with it, the fortunes of numerous other SaaS stocks. This provided a window for Microsoft to acquire the company, something Microsoft's been wanting to do in their own way.
Ben and David categorize the acquisition as a "product acquisition" with the potential to transform Microsoft's business processes. They think Microsoft needs to have better access to identity and better data to enrich their other product offerings, with a holistic view of an individual's skills, career history, and identity.
The hosts identify several strategic reasons for the acquisition. First, integrating LinkedIn with Office 365 extends Microsoft's identity management beyond company boundaries and is particularly valuable in a world where employees frequently change jobs. Second, integrating LinkedIn's data with Dynamics CRM provides a comprehensive view of potential customers, improving sales and marketing efforts.
They also note that LinkedIn was "on sale" after its stock decline, making it an attractive target. Additionally, Microsoft likely saw the acquisition as a competitive necessity, preventing other companies like Salesforce from acquiring LinkedIn and further encroaching on Microsoft's enterprise territory. By acquiring LinkedIn, Microsoft defends its position as the provider of productivity and business tools for enterprises. Microsoft’s recent history of not doing particularly well with integrating acquisitions, though, does leave some execution risk on the table here.
The discussion shifts to the power of network effects and LinkedIn's dominance in the professional networking space. While LinkedIn's product quality is often criticized, its vast network and high switching costs make it virtually unassailable by other companies. Ben and David suggest the only way to disrupt LinkedIn is by attacking it vertically, and by making that service more valuable for a specific customer base.
The hosts discuss Microsoft's debt financing of the acquisition due to its cash holdings being primarily overseas, which would incur substantial taxes if repatriated. The hosts also discuss the enormous amounts of stock based compensation, which would dilute Linkedin's share price, but that that is now Microsoft's problem.
Ben grades the acquisition as an "A-" due to the significant execution risk involved in integrating the two companies. David grades it as an "A", noting its value relative to its peak valuation and its potential strategic impact on Microsoft's cloud services strategy. They both agree on the huge opportunities ahead, as long as Microsoft can execute on it.