The software giant with $100 billion in cash under its belt, Microsoft decided to make a huge purchase by acquiring LinkedIn for $26.2 billion.
With LinkedIn is Microsoft's biggest acquisition, Skype comes in second, from it being purchased for $8.5 billion back in 2011. There was a Microsoft acquisition that has proven to be a complete failure, The Fool reported.
In May, Microsoft paid Nokia's phone division for $7.2 billion, and some Investors are still scratching their heads on that one. The corporation also attempted an acquisition of Facebook for $15 billion in 2007, however, it failed, and they ended up picking up 1.6% stake for $240 million. Indian Express reported.
According to Gartner analyst Vishal Tripathi, LinkedIn has the biggest social network of professionals, including recruiters, job seekers, human resources and more. Since Microsoft plans to acquire to the business-oriented social network, they will try to position two of its products which are Office 365 and Dynamics, and since the social network is now an alliance with Microsoft, the tech corporation is expected to bring in financial stability for LinkedIn.
Many analysts find some potential in Microsoft's latest acquisition, but it's certainly not a sure thing.
Here are three reasons Microsoft's latest purchase is not a good play.
Extremely pricey
Microsoft is acquiring LinkedIn for a very high price as they buyout price of $196 per share values the company at 91 times EBITDA over the trailing 12 months. Microsoft is still shelling out 26 times EBITDA. In comparison, the company paid 46.7 times EBITDA for Skype and 40.7 times EBITDA for aQuantive, an ad tech company it purchased for $5.5 billion back in 2007.
The company is paying $250 per average monthly visitor, and $60 for each of LinkedIn's 433 million registered users. Unlike Facebook, it did not pay that much for their WhatsApp Acquisition, when it bought the messaging app for $19 billion. The social media company only paid $42 for each of its 450 million active users, thus making WhatsApp grew to over 1 billion users.
Unprofitable assets
Paying a hefty premium would not be a huge concern if LinkedIn was highly profitable. LinkedIn uses a lot of stock-based compensation to pay its employees. That makes its EBITDA look good, however, its net income according to generally accepted accounting principles (GAAP), is a different issue in itself.
Last year, LinkedIn lost $166 million in $2.99 billion in revenue. The net loss widened from $16 million back in 2014. It was profitable from 2011 to 2013, but the increased spending on product development and a lower gross margin led it back into the red.
Meanwhile, new products caused revenue growth, LinkedIn's revenue growth in 2016 is expected to be reduced by more than 10 percentage points to 24.5%, and to just 19.6% next year. Comparatively, the larger Facebook continues to grow rapidly, with analysts expecting 45.2% revenue growth this year.
No clear path
Many analysts find potential for LinkedIn to boost Microsoft's cloud enterprise software, and vice versa, however, there is no clear plan for how Microsoft will successfully do this.
Its aQuantive purchase shows how poor Microsoft is at running an ad business despite its drive to grow Bing, and soon, the corporation sold some of the aQuantive assets to Facebook.
As mentioned earlier, they bought Nokia's phone division, however, the company failed to integrate Nokia's devices with its mobile software business.
