Friday, August 5, 2016

Linkedin and Microsoft merger

This is likely the final post in the series critical of Linkedin as a stock proposition.  Last entry in the series.  Microsoft will acquire the company for $26B.  The previous entries go into detail why the stock is relatively worthless.  This final post takes those conclusions for granted.

Linkedin 2Q-2016 results
Another consecutive loss and negative free cashflow.  Though they did significantly outperform guidance based on strong international revenue recovery.  Still their US business is dying, and international spike is more likely a recovery from previous macro headwinds, thanks to refugee migration, than sustainable growth.

The signal of LNKD accepting $26B
Reid Hoffman understands that the company is a piece of shit not worth the $35B market value that it had previously reached.  Previous stock compensation would also get management on board with cashing out, if they understood that the option strike prices they were holding were unreachable.

The mistake in my previous analysis was considering Hoffman an insider of the company.  Its his sole voting discretion to sell the company, and treating the corrupt stock structure that allows management insiders to use the stock as a golden goose to enrich themselves with stock compensation is fundamentally a liability to Hoffman.  The realization that the company is a worthless no margin enterprise, brings up the double edge of stock compensation:  Retaining talent is difficult and causes even more business deterioration when the talent realizes their past compensation is worthless.  A realization that would have occurred as a result of previous stock price drop.

Reid Hoffman understands (by accepting the buyout) that it is unreasonable for him to hope the company would ever be worth $26B (after compensation dilutions).

Microsoft's strategy
There are zero synergies between the businesses.  MSFT's reasons for the acquisition are to go after a different business that makes no money: CRM. (Salesforce.com) which is B2B sales facilitation.  Its reasons for wanting to get into this unprofitable business are only indirectly related to better penetration of its cloud and database services.  Competing with CRM might drive its purchaseable value down to $50B.

Linkedin's non-HR B2B platform (premium subscriptions) is its smallest and most stagnantly growing segment.  It will require significant development and investment to create a platform that competes with CRM.

This strategy theory is not public, but even if terrible, is far less stupid than Nadella's moronic public justifications for the merger.  The reasons for keeping it non public are that it would admit anti-competitive intent towards CRM, and expose the Linkedin membership proposition as a ruse to sell unsolicited (non-job offer) communication access to the membership.  The common mistake in valuing web site membership assets is treating the asset like a 90s cable/phone subscriber that have no other choice but to perpetually pay the membership costs.

If MSFT had any interest in the HR business, it could have bought Monster.com for under $1B, and invest in it to clone linkedin offerings.  Linkedin's enginering metrics (cost of revenue including depreciation (server costs) are the worst in the industry.  MSFT's declaration to leave the company alone admits that it has no interest in leveraging its own IT skills to create value in the business, and admits to seeing no value in the HR industry.

The cost to Microsoft
$26B purchase price is being financed by nearly $20B in bond offerings.  The contracted interest expenses for those bonds are $11.568B over their terms.  The annual interest cost is $530B.

Very optimistic forecasts for Linkedin's growth (consistent with the most bullish analyst projections) will result in $100M incremental annual profit over the next 10 years, and then likely stop growing.  Under this model, profits over the next 11 years will equal the cummulative interest expenses over those 11 years.  Then bring in $1B in profits per year thereafter.

The optimistic profit stream would contribute $500M over interest expenses starting in 2027.  To pay back the $37.5B acquisition costs will take about 86 years.  A different payback calculation is 11 years to pay $5.5B of interest cost.  Another 6 years to repay remaining interest cost balance.  26-52 years to repay debt principal and additional $6B cash purchase price:  43-79 years payback.

Microsoft Stupidity:

Microsoft logic:
  1. Everyone loves to buy Nokia phones
  2. Lets overpay to take them over, then spend massive resources on an operating system for their phones.
  3. If everyone loves Nokia phones so much that they will overpay for them then there is some hope we can make our investment back.
  4. ?
  5. Write off the entire Nokia acquisition years later and close down the division.
The repeat of the Nokia mistake in the Linkedin acquisition is mistaking linkedin members or Nokia customers as captured slaves.  Linkedin members sign up purely in the hope that it will lead to employment opportunities.  Massive development effort designed to leverage assumed captured slaves may not payoff.  43-80 year payback timeframe excluding new development efforts means even lower success probability than its Nokia strategy.

9 comments:


  1. I think the main point here is succession. Cumming/Steinberg have been working on succession for a long time and they really like Richard Handler, having worked with him for a very long time (he brought to LUK some of the best investments).
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