Good sentences about mergers and acquisitions

An all-cash deal where the combined entity is trading down on the news is basically the exact opposite of bubble behavior.

That is from Conor SenGrodaeu remarked:

Microsoft had to move quickly before the ECB bought it


This is very interesting. At first level it is straightforward. LinkedIn is hugely successful and Microsoft can raise the money. At second level though, how many big tech companies trust "Microsoft" to provide them candidates? I might be paranoid enough to think MS was sending me second-stringers. Or I might worry that if I do non-Microsoft tech I might not get good placement. It would make a good novel, with a job-search company, THE job search company social-engineering a country.

Github as the new LinkedIn? Are there other contenders?

The percentage of LinkedIn members who are in the tech industry has to be a single digit percentage. Perhaps there will be some Silicon Valley competitor spring up for that corner of the world, but for the normal 98% of us there isn't much concern. I work in the finance industry, where LinkedIn is the single most important networking and job finding tool out there (by a long shot). I'm not really concerned about Microsoft poaching talent (any more than I would be now).

I've been pleasantly surprised by Microsoft in the last 2 years. There was a culture of mediocrity under Ballmer that the new CEO has been able to wash off and start delivering better consumer products.

A co-worker of mine had a the new Surface– really impressive. Azure is also nicely competing with AWS (though it did start at a huge disadvantage).

On the job search angle– most of this industry works on a CPC (cost per click, pricing on the selling front) and CPA (cost per acquisition, target metric on the buying front). If Linkedin sends you bad candidates, you will switch to the one with the best cost per quality applicant.

Linkedin is also by far the strongest professional network in the world, and the standard CV for a lot industries, especially if you are young.

Agree. Microsoft has become freewheeling in a good way. I don't like the vulnerabilities in their OSes(*), but as a business they are running much better.

* - more consumers should Chromebook and not worry link

Microsoft may make a lot of laughable decisions, but as a business they have performed pretty well throughout their history. The proof is in the pudding.

"I’ve been pleasantly surprised by Microsoft in the last 2 years. There was a culture of mediocrity under Ballmer that the new CEO has been able to wash off and start delivering better consumer products."

I hope you're right. Office 2013 feels like a bad joke MS played on its customers.

'An all-cash deal where the combined entity is trading down on the news is basically the exact opposite of bubble behavior.'

Some ideas are too stupid to be valued as good even in a bubble.

If MSFT paid cash for the proverbial golden goose the share price of the combined entity would fall on the news.

I recall from M&A guys that any merger, due to accounting rules, is somehow accretive in that shares afterwards are worth more than before. Something about goodwill in any purchase price greater than the asset price being somehow absorbed by the parent. M&A guys know what I'm talking about (I don't).

As for LinkedIn, I dropped out of that bogus pyramid scheme for business contacts years ago and have not missed it. If Ray Lopez is not listed in LinkedIn, how influential can it be? I bet billionaires, pace P. Thiel, use a paper Rolodex and/or just memory to contact their peers. They don't need no stinkin' LinkedIn.

I recall from M&A guys that any merger, due to accounting rules, is somehow accretive in that shares afterwards are worth more than before.

Not quite--the valuation of the acquiree generally exceeds what the balance sheet would suggest because accounting rules limit the latter to the actual assets comprising the company, so the difference is line-item'd as "Goodwill," but the shares themselves don't necessarily have to move in any particular direction.

I don't understand what that's supposed to mean.

Why wouldn't the combined entity trade down if the market thinks LinkedIn would do better by itself?

Yes, I think so. So then it is value-destroying empire-building, right? Which I would think is more likely to happen during a bubble.

Maybe I am missing something in the thought chain here.

You need people to behave irrationally to have a true bubble. The market looking at something like this, saying combined value goes down, suggests things are behaving rationally. Also, market doesn't think anyone else will try to be hostile and pay more - so no bidding war which again can happen in a bubble where you think you have to buy something because someone else is buying something.

Okay, that's fair. But couldn't the bubble behavior be in the underlying corporate behavior, i.e., lots of cheap money laying around leading to empire-building, value-destroying acquisitions, but also to other, harder-to-evaluate waste? Perhaps there is a broader, systemic problem of cheap money leading to wasteful corporate adventures, only some of which can be fully evaluated for their wastefulness by investors (it is easier to look at an acquisition like this and say "well you way overpaid for that asset" than to make the same judgment about internal expansions, process changes, R&D etc). So the story would be the market is rationally setting prices when taking things at face value, but that it is taking things at face value that it shouldn't.

If you click through the to article, Sen suggests that this deal may be indicative of a bubble, but not in the sectors people generally fret about.

The problem isn't Microsoft acquiring LinkedIn because everyone is blinded by hubris; it's that corporate debt markets have given Microsoft so much room to maneuver that it can't see a reason not to purhcase LinkedIn.

The 'conglomerate discount' has been documented and studied. With big conglomerates, the whole is worth less than the sum of the parts. The most common and likely explanation is misallocation of resources, including much of what you mentioned (empire building, etc.). There's also the idea of 'fairness' misapplied - it's not fair for some divisions to get all of the expansion funds while other divisions are laying people off; it's more fair for all the divisions to cut back in bad times and expand in good times, even if that means making a bunch of bad investments while passing up good investments (i.e. destroying value for the sake of emotions). Also, it's not fair to pay some people many times what you're paying others, just because some people have rare skills that are adding value to the conglomerate while others are in jobs that should actually have been eliminated.

What if LinkedIn knows something the rest of the economy doesnt? Cashing out before the turmoil down the road...

Microsoft overpaid and the market is reacting.

Further this deal doesn't have the *shudder* synergies of the other two potential acquisitions: workday and salesforce.

It is interesting how Microsoft always overpays. I'm not sure why it happens, agent problems? Brand? Something in their corporate culture? Weak leadership?

I follow baseball, and good baseball management is able to find talent "on the cheap" because they can identify a player who is going to be good, but other teams don't realize it yet. Bad baseball management can only overpay for the superstar that everyone already realizes is great. Microsoft is like the latter.

Microsoft has made a series of missteps both in their internal development and acquisition of other companies that suggest they are poor at predicting what the future market is going to be like and what technologies are going to "win".

Shorter dan1111: 'MSFT is like the NY Yankees'. Agreed. That's why I sold (and nearly doubled my money) a while ago.

Bad baseball management can only overpay for the superstar that everyone already realizes is great.

The baseball free agent market has seemed to me to be a wonderful example of the "winner's curse" for many years. I think they are starting to catch on, but maybe not.

Oh boy, a large corporation is broadening its reach. This is surely the path towards individual liberty and good governance.

The purchase price is well below Linkedin's high water mark. Perhaps its management can see the writing on the wall.

Why might the ECB have bought it? That makes even less sense than Microsoft buying it. (Unless you're not talking about the European Central Bank?)

Paying $26 billion for a company that loses money (LinkedIn lost $166 million in 2015) is not bubble behavior? And it's not as though LinkedIn is projected to make a profit. Ever. Sure, one can argue that "earnings" don't matter, that LinkedIn is projected to have a positive EBDITA, eventually, but translating that into $26 billion in value requires a willing suspension of disbelief. Of course, the same can be said of lots of so-called tech companies whose P/E ratios are infinite. Earnings do matter, no matter what the bubble heads may say. So why have the bubble heads reacted to the acquisition by trading down Microsoft's stock? Because they expected LinkedIn stock to return to its high water mark, and the acquisition proved that they are nuts and Microsoft is only partly nuts.

rayward, I knew I could count on you for a little sanity.

Unless you know more about the terms you dont know anything. For example, if the deal gets tied up, and falls apart, Linkdin could fall but I dont know if they receive a payment or not for hanging on and for how long; similarly, MS overpaid to jump other potential bidders, the combined value would be lower. You dont know anything unless you know something about the deal terms, valuation and probabilities of challenges or delays or potential bidders or whether the staff will jump ship in the interim.

Here's a link to the conference call where Satya Nadella and Jeff Weiner discuss the acquisition:

It sounds to me like this is very much about big data and machine learning. Sounds like Microsoft wants to be able to model productivity and how the flow of people and skills and connections throughout the workforce impacts the organizations overall. There may be a bit of taking on HR recruiting methods in a direct way. (Tyler posts about blind interviews being better, this could be that on steroids?)

For what they want to do, it seems it only works due to the dominant presence both have - network effects are important for both. MSFT has had rough time with acquisitions, and Nadella is sensitive to that. He indicates LinkedIn will operate largely seperate from MSFT to preserve their culture.

I'm not a current MSFT shareholder (used to be), but my initial gut reaction was $26B is alot of money for a company that's unprofitable, and these things tend to go badly. It seems MSFT is changing though, so maybe there's a new more effective vision behind this.

Nobody's probably reading anymore, but I wanted to add this that I came across arguing for valuation of LinkedIn, argues it has hidden profitability:

The analyst argues that much of LinkedIn's sales and marketing expenses really should be amortized, but are instead expensed in current year producing the growing GAAP losses that we see. The analyst argues at some point LinkedIn will be able to significantly cut back these sales and marketing expenses and will have large profits. Says if it were to do that today, GAAP profitability would be over $1B annually.

I guess the dropping value of the combined entity tells you you're probably not in the upward-ramping stage of a bubble specifically in Linkedin shares, and you may be in the deflating stage. It doesn't tell you there's no bubble. I don't claim to know a lot about its financial potential, but >13x sales for a loss-making company with rapidly decelerating growth sounds pretty bubbly toppy to me.

Sorry, misread a number, it's only a bit more than 9x sales. Still.

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