Why would Microsoft pay $26.2 billion for LinkedIn?

When news broke yesterday of Microsoft’s $26.2 billion purchase of LinkedIn, it left a few people scratching their heads.

Firstly $26.2b is the most Microsoft have paid for any acquisition. In fact it’s probably close to being more than every other previous Microsoft acquisition combined (including $8.5b for Skype and *cough* $7.2b for Nokia – a move which possibly cost Steve Ballmer his job as well as that of 1800 Nokia staff).

Secondly, declining LinkedIn revenues has meant that shares recently took a tumble by 43%. This is despite investing in a revamped news feed, messaging options and a new enterprise recruiter product which helped LinkedIn to become the 28th biggest global website, with 433 million users. Microsoft have actually paid a 50% premium on LinkedIn’s shares, as they stood last Friday.

Added to that, Microsoft aren’t going to tamper with anything in terms of LinkedIn’s brand identity. LinkedIn CEO Jeff Weiner, in an email to his employees announcing the news, went on to liken it to other acquisitions made by Google and Facebook:

“His [Satya Nadella’s] vision was to operate LinkedIn as a fully independent entity within Microsoft, a model used with great success by companies like YouTube, Instagram and WhatsApp. I would remain as CEO and report directly to him instead of a board…We would partner on how best to leverage this extraordinary combination of assets while pursuing a shared mission.”

So, what are the potential reasons behind the “World’s Leading Professional Cloud and the World’s Leading Professional Network” (Nadella’s words, not mine) coming together? There are a few, but ultimately it all comes down to data.

Why did Facebook pay $19b for Whatsapp when it had its own messenger service, more resources, and Whatsapp didn’t make any money anyway? It’s because of the hold Whatsapp has on your data – it’s tied directly to your phone book, and you can’t keep your addresses private from Whatsapp.

When Microsoft comes to own LinkedIn, they will be able to create an ‘all-encompassing’ user profile which includes their documents, their contacts, email and Skype.  That leads to a lot of knowledge which is of huge benefit to advertisers.

Think about what you share (or could potentially share) on LinkedIn – your personal details, your history of employment, your skillsets, who you associate with, your user generated content…basically everything about you from a professional point of view.

Satya Nadella, in his note to Microsoft employees, explained (as much as Nadella ever explains anything) the link with Microsoft products Office 365 and Dynamics, and how LinkedIn data would be shared across these networks:

“How people find jobs, build skills, sell, market and get work done and ultimately find success requires a connected professional world. It requires a vibrant network that brings together a professional’s information in LinkedIn’s public network with the information in Office 365 and Dynamics. This combination will make it possible for new experiences such as a LinkedIn newsfeed that serves up articles based on the project you are working on and Office suggesting an expert to connect with via LinkedIn to help with a task you’re trying to complete.

As these experiences get more intelligent and delightful, the LinkedIn and Office 365 engagement will grow. And in turn, new opportunities will be created for monetization through individual and organization subscriptions and targeted advertising.”

Microsoft’s reasons for buying LinkedIn are all about creating the opportunity for growth. To do that these days, you need data. And lots of it.

We keep hearing about ‘disruptive’ companies who are using technology to do things differently, unsettle an existing market, and in so doing displacing a long and established hierarchy. Microsoft want to be the hierarchy that survives, so it’s no wonder that they’ve put such a high price on the value of data given that:

• Uber is now the world’s largest taxi company but doesn’t own any taxis
• Netflix has become the world’s largest movie house (with 70 million subscribers), but doesn’t own any cinemas.
• The largest accommodation provider doesn’t provide any accommodation (Airbnb)
• The largest software vendors (Apple and Google) don’t write their own apps

(IBM Entrepreneur)

What do all these companies have in common?

For me, it comes down to three things:

1. They are customer first, with a focus on consumer convenience
2. They’ve invested in mobile and smart technology which is powered by big data and consumer insights.
3. They’re benefitting from a cultural shift. Traditional companies have ownership divided between management and investors. In his book, ‘The Sharing Economy’ Arun Sundararajan explains that there is a current shift towards ‘crowd based capitalism’. So instead of giving a friend a lift in your car and have a guest stay overnight (both of which you do out of the goodness of your own heart), you provide these services to strangers in exchange for money. People are becoming more comfortable with letting users run their business, and taking a percentage of the revenue.

Microsoft’s acquisition of LinkedIn ticks a lot of these boxes – as the BBC’s Rory Cellan Jones put it, “Nadella sees its [Microsoft’s] future as a cloud computing business providing all sorts of professional services to clients – including a social network to connect them to each other.”

Coming back to my earlier point about the amount of details LinkedIn holds about you, what then are the downsides of sharing this data with Microsoft?

Well, when Cortana knows everything about you from a personal point of view (your search history, your appointments, your productivity levels…) and LinkedIn knows everything about you from a professional point of view…that’s a little bit too dystopian for my liking.

The Register, always a refreshing view on these matters, cites an interesting example in an article titled, ‘The Microsoft-LinkedIn hookup will be the END of DAYS, I tell you’

“Imagine how valuable all that information is…you could sell that as part of employer analytics, employee/employer ‘matching’, you name it. Looking for a work-from-home type that actually works eight hours a day? Now Cortana can give you a list of profiles! Looking for people who get paid eight hours a day but actually work 12? Cortana knows!”

Perhaps that’s a little extreme, who knows.  But the point is, Microsoft seem hell bent on getting their hands on vast amounts of data which will allow them to get to know businesses a lot better.

So whilst it might seem like an unlikely marriage on paper, has Nadella grabbed himself a $26.2b bargain that will help Microsoft to become the most disruptive company of them all?