And of course, the largest acquisition prior to the recently announced LinkedIn purchase was the $8.5 billion Microsoft paid for Skype in 2011. I love Skype and use it almost daily. But as much as I like both Skype and Microsoft, I don’t see that Microsoft has done much to monetize Skype or even to push for its wider acceptance. In a world in which new messaging and voice apps pop up every other day, Skype seems to be withering on the vine.
So Microsoft’s track record on acquisitions has been just about awful. But will the $26 billion purchase of LinkedIn be any different?
Let’s consider the numbers. LinkedIn seems to have the same fundamental issue that every other social media company other than Facebook (FB) does. It doesn’t have much of a business model. It’s lost money in six of the past eight quarters and shows no sign of breaking that streak any time soon. Some of this is growing pains; the company has more than doubled its revenues since 2013. But that’s still a long string of losses for a company LinkedIn’s age.
Yet despite the earnings disappointments, the stock still isn’t cheap. It trades for 8 times sales. Given Microsoft’s track record with acquisitions, it’s hard to see even the most optimistic scenario justifying that kind of a valuation.
Satya Nadella has done a fine job of rebuilding Microsoft as a cloud-focused business services company, and perhaps this is part of some greater plan. Microsoft has specifically mentioned data mining LinkedIn’s vast mountains of data as a major selling point. But Microsoft’s biggest problem in its acquisitions has bee its inability to integrate them well (see Skype as an example).
All in all, I’d consider this a bad trade for Microsoft. With over $100 billion in cash, Microsoft can make the occasional extravagant purchase like this without a lot of consequences. Though it is worth noting that Moody’s did put MSFT’s AAA credit rating under review in response.
Disclosures: Long Microsoft
Charles Lewis Sizemore, CFA is the principal of Sizemore Capital, an investments firm in Dallas, Texas.