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Citi Likes Microsoft's Purchase, But Not For $26 Billion

Citi Likes Microsoft's Purchase, But Not For $26 Billion

Citi’s Walter H. Pritchard believes that $26 billion “is a lot to pay” for Microsoft Corporation (NASDAQ: MSFT) to acquire LinkedIn Corp (NYSE: LNKD), especially given that the acquisition “doesn’t address #1 challenge of developer relevance.”

Pritchard reiterated a Sell rating on Microsoft, with a price target of $36.

Medium- To Long-Term Value

The analyst mentioned that Microsoft had noted revenue synergy opportunity from the acquisition.

However, although the opportunity might be there, Pritchard believes it would mostly be in the core, with the Office/O365 value proposition being enhanced with Outlook, as compared to medium-to-long term impact via social selling, Office Graph and HR-related synergies.

Related Link: Why Wunderlich Endorses Microsoft's LinkedIn Acquisition

“In core, value prop is to march customers up SKU ladder through upsell of offerings that include LinkedIn integration, something we see of value,” the analyst stated.

What It Means For Microsoft

Although Microsoft reaffirmed its commitment to completing the remaining $10 billion in share buybacks, Pritchard expects the LinkedIn acquisition to make it tougher for the company to return capital at the current pace beyond FY17, given Microsoft’s borrowing capacity.

“Our math suggests for FY19 deal accretion LNKD revenue growth must re-accelerate to >20 percent. While possible, we are skeptical due to the fact that we see revenue synergies as nebulous and less concrete,” Pritchard pointed out.

In fact, the analyst expects opex to resume growth, despite synergies.

Pritchard does not expect Microsoft to undertake more acquisitions in the near term.

Latest Ratings for MSFT

Oct 2020Credit SuisseMaintainsOutperform
Oct 2020Morgan StanleyMaintainsOverweight
Oct 2020Piper SandlerMaintainsOverweight

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