With its disastrous acquisition of Nokia’s handset division three years ago, Microsoft was looking backwards as it sought to fight an old battle. In reality, it had already lost the smartphone wars to Apple and Google, leaving its Windows operating system out in the cold and leading to the ignominious writedown of the unit last year.
Satya Nadella, who became chief executive in the shadow of that deal, is now placing a much bigger bet on what he hopes will be Microsoft’s future: not technology platforms like operating systems and handsets, but the applications and services that run on top of them.
The result — the $26.2bn purchase of professional networking site LinkedIn — is by far the biggest acquisition in Microsoft’s history, dwarfing the $8.5bn it paid for Skype five years ago or the $7.3bn for the Nokia assets.
Mr Nadella had already revealed a potential appetite for giant deals to make up for lost time, as he tries to accelerate the move from the old world of PC- and server-based software to the new world of cloud computing. A year ago, Microsoft briefly considered a bid for Salesforce.com, the leading seller of cloud-based application software, a deal that would have cost more than $60bn.
But while buying LinkedIn reflects the same strategy of using acquisitions to build a faster-growing cloud services company, it was not the deal many financial analysts and technology experts had been expecting.
The reaction of Gartner analyst Brian Blau sums up a wider sense of surprise: “Seemingly odd.” A company that makes most of its money from helping recruiters target people to hire is combining with one whose largest business involves creating much of the basic software workers use every day at work.
Mr Nadella tells the Financial Times that access to LinkedIn’s data and its 433m individual users, along with their professional connections, will put Microsoft in a position to “reinvent business processes and productivity”.
The professional profiles people create on LinkedIn, he suggests, could be fed into other Microsoft services, from Word and PowerPoint to Skype. Microsoft could inject information about users of its Office productivity tools, such as their upcoming meetings or projects they are working on, into a common news feed based on their LinkedIn network and interests. And salespeople who rely on Microsoft software could pull in data from LinkedIn to find out more about potential leads.
In terms of finances, at least, Microsoft should be able to take the acquisition in stride. Even after allowing for $46bn of existing debt, the software company still has more than $70.5bn of net cash on its balance sheet. Almost all of its liquid resources are overseas, given the higher taxes it would have to pay if it brought the cash back to the US, and Microsoft said it would borrow the money needed to buy LinkedIn.
But Wall Street’s confidence in Microsoft’s ability to pull off a giant acquisition has been hit by recent failures. Besides writing off most of the Nokia acquisition cost, the software company also wrote off the most of the $6.3bn it paid for online advertising company aQuantive nearly a decade ago. The company “has never done well” with large deals, UBS software analyst Brent Thill pointed out in a note to investors. Mr Blau put it more bluntly, calling Microsoft’s acquisition record “terrible”.
One question is whether LinkedIn represents as strong a network as Microsoft claims. Used mainly as a site for recruitment, LinkedIn has been trying for years to turn itself into a more active network that users turn to more frequently in their daily jobs.
“There have been signs of slowing growth and engagement,” says Mr Blau. “They’ve been struggling.” He adds, however, that LinkedIn is still “a great brand, and they’re top of what they do. They have the world’s best collection of people at work.”
Microsoft’s record in integrating large-scale acquisitions into its own software and services has also been patchy. The acquisition of social network Yammer, for instance — designed to help workers connect more easily with colleagues — has not yielded a breakthrough in the company’s wider set of collaboration tools. Nor has Skype’s internet calling become a key tool in other Microsoft products.
“It’s done fine — but I don’t know if they’ve taken it to places Skype wouldn’t have gone to on its own,” says Al Hilwa, an analyst at IDC.
Perhaps even more significantly, Microsoft will have to prove that it can integrate a large-scale operation into a strong internal culture built around its historic PC software dominance. There could be a “culture clash” between LinkedIn’s younger staff, based in Silicon Valley, and Microsoft’s “grown-up culture” at its headquarters near Seattle, says Mr Thill.
To lessen those worries and calm the nerves of LinkedIn’s workers, Mr Nadella says the professional network would continue to be run from its Silicon Valley headquarters. But that, in turn, will make it harder to get the claimed integration benefits from the deal, says Mr Blau.
Mr Nadella’s response to such questions: “Of course we’ll learn from the past.”
After all the pain from earlier acquisitions, Microsoft investors will certainly be hoping he is right.
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