Microsoft's LinkedIn Acquisition: Is This Another Nokia Or Is There Real Value Here?

Not Like Other Deals

Bernstein clarifies that the LinkedIn deal is "markedly different."

"While a deal this large reminds many of failed acquisitions of Microsoft's past, under the former CEO, most notably Nokia Corp (ADR) NOK, we believe this deal is markedly different," analyst Mark Moerdler wrote in a note.

The acquisition, which provides Microsoft with access to LinkedIn's 433+ million members in over 200 countries, would integrate LinkedIn Sales Navigator, LinkedIn Recruiting and Lynda.com with Microsoft's Office 365 and Dynamics CRM.

The analyst noted that Nokia was "a low-growth acquisition of revenue in a commoditized industry with no strategic value." On the other hand, LinkedIn "not only provides significant strategic value," but generated FY15 revenue of $3.0 billion, up 35 percent from last year on 41 percent growth in talent solutions (61 percent of revenue).

Furthermore, the deal "could provide potential cross-sell opportunities and long-term revenue synergies given the superior functionality and value of data now under Microsoft's control."

Moerdler highlighted that the deal "would generate incrementally stronger revenue growth, particularly with commercial customers, where on-premise license sales have been weak."

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"We understand that some board members have been concerned about declining on-premise commercial license sales and are aggressively pushing to accelerate Microsoft's transition to a cloud, mobile and recurring revenue business model," Moerdler noted.

Rating And Further Justification

Moerdler, who has an Outperform rating and $68 price target on Microsoft, said the acquisition "should help to offset some of these declines and strengthen Microsoft's position as a cloud solution provider for enterprises."

The deal is likely to further "strengthen the Microsoft ecosystem beyond that of Windows, Office Suite, and Azure to include far greater reach into the social and mobile parts of the consumer market, as well as commercial customers."

Notably, LinkedIn would enhance the value proposition of Microsoft's "Dynamics CRM and Marketing solutions to better compete with salesforce.com, inc. CRM, using machine learning combined with the rich data provided through LinkedIn."

"Microsoft may now have an advantage here if they push more aggressively into marketing software given that the company will now control and own location data (from Windows mobile devices), search data (through Bing), and social data (through LinkedIn)," Moerdler highlighted.

In addition, the deal offers Microsoft a new vertical in the form of the enterprise HCM/HR software market to compete with companies such as Workday Inc WDAY and would position Microsoft to be a leading player in such a market.

"This acquisition is revolutionary in that it marks the first time a company positioned to offer the software tools can now leverage unlimited (and potentially exclusive) access to high-value social data under their control. This could potentially position Microsoft to provide high value enterprise grade services using social data in ways that have not been done (or thought of) before," Moerdler added.

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While Microsoft expects the acquisition to be approximately 1 percent dilutive to non-GAAP EPS in FY17 and FY18, the acquisition should be accretive to non-GAAP EPS in FY19. In addition, Microsoft expects to generate $150 million of cost synergies annually by 2018.

At the time of writing, shares of Microsoft were down 0.51 percent to $49.89.