Global tech stock Microsoft wants to get LinkedIn

Microsoft’s pending $26.2 billion acquisition of LinkedIn is tinged with uncertainty. While the deal is expected to accelerate Microsoft’s earnings per share growth, a failure to integrate could hurt this global technology stock.

In the year to June 30, Microsoft (NASDAQ─MSFT) is thought to have earned $2.67 a share. This would represent earnings per share growth of only 1.5 per cent. In fiscal 2017, which began on Canada Day, the company is expected to earn $2.88. This would work out to faster earnings per share growth of 7.9 per cent.

Keep in mind that Microsoft’s planned acquisition of LinkedIn (NYSE─LNKD) is expected to close sometime before the end of 2016. This means that full benefits will occur in 2018. This could drive up Microsoft’s earnings per share growth and its share price. On the other hand, the United Kingdom’s vote to leave the European Union could hurt Microsoft’s sales in Great Britain and the rest of Europe.

The deal is Microsoft CEO Satya Nadella’s latest effort to revitalize the global tech stock giant which was viewed not long ago as left behind by shifts in technology. Mr. Nadella hopes the deal will open new horizons for Microsoft’s Office suite as well as LinkedIn, both of which have saturated their markets, and generally bolster Microsoft’s revenue and competitive position.

Linking office tools to professional networking sites

Mr. Nadella said today’s work is split between office tools workers use to get their jobs done, such as Microsoft’s Office programs, and professional networks that connect workers. The deal, he said, aims to weave those two pieces together.

For instance, connecting Office directly to LinkedIn could help attendees of meetings learn more about one another directly from invitations in their calendars. Sales representatives using Microsoft’s Dynamics software for managing customer relationships could pick up useful tidbits of background on potential customers from LinkedIn data.

Microsoft also sees opportunities in Lynda.com, a channel for training videos that LinkedIn bought for $1.5 billion last year. Microsoft will be able to offer Lynda’s videos inside its own software, such as Excel spreadsheets.

The deal highlights Mr. Nadella’s bid to reshape Microsoft a little more than two years after taking the helm. The CEO, who rose through the ranks of its business applications and server groups, has focused much of the company’s efforts on products and services for corporate customers.

As CEO, he has extended Microsoft’s platform to platforms that it doesn’t control, including Android mobile phones and the Linux desktop operating system. And he has pushed to connect Microsoft products to data sources that can provide customers with timely, useful information and to develop services intended to anticipate information users want and actions they’ll take.

Information technology stocks merger not without risks

As for the LinkedIn deal, The Economist magazine points out that Microsoft’s acquisition carries three risks. The first is financial. It is shelling out the equivalent of $260 for each active monthly LinkedIn user. To keep shareholders happy, it will need to add users to LinkedIn’s platform or be clearer about how it can make money from their data. Given its size, LinkedIn’s growth is likely to slow.

A second risk is Microsoft’s poor record with big tech stock acquisitions. The Economist writes: “Microsoft squandered over $6.3 billion on aQuantive, an online advertising firm that it bought in 2007, and $7.6 billion on Nokia’s handset business in 2014. LinkedIn is the largest acquisition in its history and the risks are greater than ever.”

A third risk is behavioural. Microsoft wants to became the destination “for news and other details of people’s lives”. But some employers likely worry about recruiters paying LinkedIn to poach their staff. When employees spend more time to find out how their peers are doing, some may feel disgruntled and tempted to jump ship.

On the positive side, LinkedIn brings Microsoft an enviable team of data scientists, a community coveted by top information technology companies. LinkedIn is also expected to generate revenue of $3.72 billion in 2016.

Microsoft remains a buy for long-term capital gains, particularly as it rewards shareholders with share buybacks. The company’s dividend of $1.44 provides an attractive dividend yield of nearly 2.9 per cent. Even better, its dividends have grown 18 fold since it began paying 8 cents a share in fiscal 2004.

Will Microsoft’s deal attract a competing bid? Analysts say that another tech stock bid is unlikely given the size of the transaction.

 

The MoneyLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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