Microsoft recently made a remarkably large bid to claim space in the social networking sphere with their proposal to purchase LinkedIn, (the worlds largest professional social network) for over $26 billion.

The largest acquisition deal ever made by Microsoft, analysts believe that the deal signals a further move away from the software model that has traditionally sustained the company, and with plans to integrate the platform with their MS Office 365 product, another strong step in the shift to a cloud computing model.

Valuation Questions

With LinkedIn reporting some 400 million users, and a $3 billion profit margin, there is widespread speculation that the price is perhaps inflated.

However, the LinkedIn share price rose on reports of the acquisition, and while it’s not trading as high as it has in the past, there’s been a significant up-tick since the share price fell on forecasts of weaker 2016 income at the beginning of this year, and it’s now trading at almost what MS is paying for it, although lower than previous highs.

Microsoft’s previous biggest acquisition was the $8.5 billion deal that netted them Skype. At the time, the valuation for that deal was also considered high, but it has been one of the deals Microsoft made that did actually work out for them, putting them in a position to challenge Cisco for dominance of the video conferencing market, even if it can’t be called an unqualified success.

Moving Forward

Opinion is still divided on whether this is a good move or a waste of money.  Personally, I think it’s still too close to call.  LinkedIn has had acknowledged growth problems in recent years, and although its rebounded this year, growth problems can become persistent.

Their ad sales also grew by less than in previous years, but linking up with Office 365 could grow their audience, making advertising more attractive again. Or it could prejudice companies against them further.

So…it could go either way.  We’ll let you know if anything interesting happens.