Strategic investments and acquisitions are often justified with the argument that the two companies will create 'synergy' and it will benefit the shareholders through combined value and performance. Microsoft's first major and one of the most successful acquisitions was Powerpoint in 1987, almost 30 years ago. Ten years later in 1997, Hotmail.com, one of the largest acquisitions of that time. Since then there have been many acquisitions by this Redmond-based company. Some created exceptional value for the company and its stakeholders while some fell apart. And those that created value were the ones that further strengthened Microsoft's position in the market that they understand well and did well.
Nokia's smartphone division acquisition by Microsoft was a major failure because they tried entering a business that was outside their traditional business of producing enterprise products, with a buggy mobile OS and poor app store. Microsoft expected to create a synergy through its software capability and Nokia's hardware capability but it failed due to multiple reasons including insignificant user base and poor app developer community.
On the other hand, Skype acquisition was a successful move by Microsoft because it helped Microsoft to replace its aging Microsoft Live Messenger and fend off competition from Google and Cisco in the enterprise markets, and to give Microsoft a key player in the growing mobile Voice over IP market. Under the current leadership of Satya Nadella, Microsoft is further firming its position in the business that they can do well. The long-term partnership with Xiaomi through the sale of patents is a clear strategic move to promote its products on a platform that already has strong integration with similar Google products and onboard a growing hardware manufacturer to sell its operating software. Is Microsoft's LinkedIn acquisition going to create value for them through synergy?
Possibly yes. Despite Microsoft being a cash-rich company, it raised debt for acquiring a company whose stock prices have been struggling, the ad business is on a decline and has not so exciting growth. It could be argued that this is for tax benefits but still it is at the cost of financial risk. Why should Microsoft take such a risk after failed Nokia experiment? I strongly think that this acquisition can benefit Microsoft for three reasons:
1. Strengthening the core business: Microsoft has forever been in the business of enterprise software and productivity tools and this acquisition is in-line with Microsoft's corporate strategy. It also complements its shifting business model and its reinvention into a business services company. Microsoft can be in a much better position to compete with companies such as Google, Facebook, Oracle, Salesforce and SAP for various enterprise products and services.
2. Capture combinational synergies: Rather looking at LinkedIn as a professional networking site for job seekers, it should be seen as a gold mine of data and professional content, from almost all the businesses and professionals on the planet earth. LinkedIn's graph contains all the information regarding jobs, professional connections and co-workers, learning, recruiting and hiring. If this is combined with Microsoft's graph which contains information like business and professional contacts, messages, documents and calender details, it would expand Microsoft's hold on the entire business landscape.
3. Transformational synergies: This acquisition can bring transformational changes to Microsoft's existing business. We may see new products and services emerging from the tight integration of Microsoft and LinkedIn products. Integrating LinkedIn with its enterprise social networking platform, Yammer will provide bigger reach and opportunity to leverage existing professional content and create new channels to sell new products. Tight integration of Lynda.com and Office365 could potentially make Microsoft a go-to place for professional and career development for individuals. The list of possibilities can be endless.
Some may argue that Microsoft wasted $26 Billion while some may say that this deal is actually worth $26 Billion. In my opinion, it really depends on how you perceive this deal. In most of Microsoft's acquisitions, the objective has mostly been about catching up in a growing space created by others. It has rarely been about creating a new and growing space for themselves. Though this acquisition opens the door to many new possibilities, Microsoft should try focusing on things that create value and meaning for the user rather than distracting the user with many options and alternatives. If Microsoft plays its card well, then this acquisition could possibly be a game changer.
Good Luck Satya Nadella. Well done Microsoft.