Global M&A Negotiations

The negotiations between Microsoft and Linkedin

July 01, 2023 Yadvinder Singh Rana Season 1 Episode 2
Global M&A Negotiations
The negotiations between Microsoft and Linkedin
Show Notes Transcript

In March 2016, Microsoft announced the acquisition of LinkedIn for $26.2 billion $ in cash.

In this episode, we explore the key factors and the critical moments that shaped the complex negotiations between the two companies and explain why LinkedIn opted for Microsoft over Salesforce.


Audio contributions are provided by:

Microsoft to Acquire LinkedIn for $26.2 Billion: https://www.youtube.com/watch?v=B9S6iI-7o38&t=22s 

The David Rubenstein Show: Satya Nadella: https://www.youtube.com/watch?v=NUl-a3GZznQ  

Jeff Weiner Interviewed at Web 2.0 Summit 2010: https://www.youtube.com/watch?v=unnQOEuAG8o 

Microsoft buys LinkedIn - Full Announcement - Satya Nadella & Jeff Weiner - June 13th 2016: https://www.youtube.com/watch?v=IPY2sTt1dfI 

LinkedIn's Jeff Weiner, Keynote Speaker | Wharton Undergraduate Graduation 2018: https://www.youtube.com/watch?v=NMJ_UrMNyLY&t=535s 

Watch CNBC's full interview with LinkedIn CEO Jeff Weiner: https://www.youtube.com/watch?v=SvEHRcJcrcM&t=159s 

LinkedIn CEO on Microsoft acquisition, managing compassionately: https://www.youtube.com/watch?v=xvgwB-EZGMk&t=81s 



If you enjoyed this episode, please leave a review and check out our website: neglob.com

I welcome any suggestions, questions, or comments at yrana@neglob.com



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INTRO

In March 2016, Microsoft announced the acquisition of LinkedIn for $26.2 billion $ in cash.

In this episode, we'll explore the key factors and the critical moments that shaped the negotiations between Microsoft and LinkedIn.


ACT 1 – Microsoft perspective

In 2014, when Satya Nadella replaced Steve Ballmer as chief executive, Microsoft was falling behind on all the latest technology trends. It failed to catch up with Google in the search market and completely missed out on social networking. Also, the company's attempts to compete with Apple and Google in the smartphone market were ineffective. Sure enough, one of Nadella's first decisions was to shut down the Nokia mobile business. Moreover, Microsoft had a late start in cloud computing, leaving it well behind Amazon. 

One of the reasons why Microsoft constantly failed to take advantage of emerging technologies was the centrality of Windows in Microsoft. Everything had to work with Windows. 

Also, the company's culture was defined by intense competition and power plays. Employees were rewarded for doing well, as well as making sure that their colleagues failed. Internal fights at the company killed potential game-changers such as smartphone and e-book technologies. 

According to journalist Kurt Eichenwald, Microsoft became the high-tech equivalent of a Detroit carmaker. 

Microsoft turned the page in 2014. The new CEO  revised the company's mission statement and orchestrated a cultural shift in striking contrast to Steve Ballmer, for whom it was an us-versus-them fight. Nadella's approach, even with old rivals such as Google and Apple, was to cooperate for mutual advantage.

ACT 2 – Satya Nadella

Satya Narayana Nadella was born in Hyderabad, India, in 1967. His mother was a Sanskrit drama professor, while his father was an economist and public officer. He received a bachelor's in electrical engineering in India before moving to the US, where he earned an MS in computer science and an MBA from the University of Chicago.

After graduation, Nadella worked as a software developer at Sun Microsystem before joining Microsoft in 1992.

He climbed the ladder at Microsoft by successfully running the Server and Tools Business and the Online Services Division before leading the company's move to the cloud. When appointed CEO, the third in the company's history, following Bill Gates and Steve Ballmer, Nadella was labeled as a "safe choice" rather than someone who would renovate the company to pull alongside Google and Apple.

However, analysts and experts underestimated the impact his life experience, and desire to learn would have on the Indian-born executive.

In several instances, Nadella explained how raising a kid with special needs shaped him into the person he is today.

Speaking to Microsoft employees, Nadella revealed,

 "I am defined by my curiosity and thirst for learning."

"I buy more books than I can finish. I sign up for more online courses than I can complete. I fundamentally believe that if you are not learning, you stop doing great and useful things."

ACT 3 - Microsoft interests

Several analysts questioned Microsoft's commitment to pay $26 billion for a business that had lost money in the previous two years.

The reasons behind the acquisition were mainly three.

The first was access to data. 

Microsoft valued LinkedIn for the large amount of information about its professional users and for having one of the most regarded teams of data scientists in the industry. 

The acquisition of LinkedIn did more than improve Microsoft's own algorithms and services: it also removed a large source of data from its competitors.

Second, by acquiring LinkedIn, Microsoft gained a strong spot in the world of social networking without having to build something from scratch.

Third, as a result of the acquisition, Microsoft recruited LinkedIn's co-founder, Reid Hoffman, as a board member. 

Reid Hoffman was the most well-connected individual in Silicon Valley after more than twenty years of creating and developing startups.

He became Microsoft's ambassador in Silicon Valley at a time when Satya Nadella was trying to raise the company's reputation with developers, innovators, and partners that used to label Microsoft as a bet "against technological innovation," in the words of investor and PayPal co-founder Peter Thiel.

ACT 4 - LinkedIn perspective

LinkedIn was officially launched in May 2003 from co-founder Reid Hoffman's living room.

It went public in May 2011, valued at $ 3.3 billion. On the first day of trading, the company shares more than doubled. 

After years of steady growth, on February 4, 2016, LinkedIn delivered a weak earnings outlook that showed slow growth and no profits. As a result, the company's shares fell 43%, erasing three years of gains in one day.

In 2016 LinkedIn had 433 million members, but only 100 million were monthly active users. And the majority of revenues came from recruiters and not users or ads. Furthermore, LinkedIn found it costly to keep growing. The company needed to invest heavily in R&D to improve the platform and provide services appealing to its members. 

As analysts reported, LinkedIn's business model had weaknesses, and now was the perfect time to sell.

ACT 5 – Jeff Weiner

Jeff Weiner was born in New York City in 1970 and graduated from Wharton in 1992 with a bachelor’s in economics. 

After graduation, he spent six years at Warner Bros, developing the online business unit, which was later shut down as a result of the AOL – Time Warner merger. 

In 2001 he joined Yahoo as executive vice president of the Network Division. He was also selected as a potential candidate for the top role, but when the torch was passed to Yahoo! Co-Founder Jerry Yang, Weiner started looking for alternative options.

Jeff Weiner first met LinkedIn founder Reid Hoffman in 2007 through one of Hoffman's partners in the venture capital firm Greylock. The two stayed in touch, and when Weiner left Yahoo, he joined  Greylock as an Executive-in-Residence. 

LinkedIn had undergone great changes over the previous two years. The company was struggling to make money and missing the financial projection given to investors. 

Weiner joined Linkedin in December 2008 and was appointed CEO after six months. 

As the new CEO, Weiner sat down and talked to all 330 employees at LinkedIn. The insights from these conversations formed the basis for the company's strategic plan. 

During his tenure as CEO, the company grew from 330 to 15,000 employees and from 37 to 467 million members.

ACT 6 - LinkedIn interests

Audio 7.

The idea of an acquisition was raised by Weiner during a meeting with Nadella a few days after LinkedIn's share price dropped in early February 2016. 

Weiner saw Microsoft becoming a more open place, with a new mindset focusing on building partnerships instead of killing new technologies. Nadella also changed Microsoft's approach to acquisitions: acquired companies were no longer immediately integrated with other Microsoft products, and the ideas of the founders were seen as opportunities to recharge the company's culture and know-how.

LinkedIn's CEO had three crucial interests in the negotiations:

First and foremost, preserving the independence of LinkedIn within the new ownership, similar to how YouTube operated within Alphabet and WhatsApp and Instagram worked within Facebook.

Second, find a partner that could provide LinkedIn with the required resources to explore new growth opportunities.

Lastly, provide a healthy exit for most LinkedIn shareholders.

ACT 7 – Timeline of negotiations

Audio 8.

Weiner and Nadella met on February 16, 2016, to discuss current commercial relations between the companies. As the conversation progressed, the possibility of combining the two businesses came up.

On March 10, 2016, Salesforce's CEO Mark Benioff asked for a meeting with Weiner to discuss a partnership as well as a potential acquisition. The two CEOs met again four days later to explore the terms of a potential acquisition.

As of March 15, Weiner called Nadella to ask if Microsoft was interested in discussing the LinkedIn acquisition further, openly stating that other parties had expressed interest in an acquisition. Nadella stated that he had discussed the matter with the Microsoft board of Directors, and Microsoft was already working on the project. 

In the next weeks, both Microsoft and Salesforce signed a confidentiality agreement with Linkedin.

Weiner and Hoffmann also had meetings with Google and Facebook, but the two companies showed no interest in moving beyond a commercial partnership with LinkedIn.

Between April 25 and May 4, Salesforce and Microsoft submitted a non-binding indication of interest to acquire LinkedIn for a price between $160  and $165 per share, with a mix of cash and stock consideration, valuing the company between $ 21.3 and $ 22 billion. Both companies also requested LinkedIn to enter into an exclusivity agreement.

On May 6, the LinkedIn board met to revise the two offers and agreed to enter exclusive negotiations at $ 200 per share, valuing the company at $ 26.7 billion. Salesforce and Microsoft decided not to pursue exclusivity at that price point.

Audio 9.

On May 9, Bill Gates and Nadella met Hoffmann to discuss the potential benefits for Microsoft and LinkedIn from the acquisition, highlighting that Linkedin would preserve its independence. During the meeting, Nadella and Gates offered Hoffman a seat on Microsoft's board.

In the next few days, the revised proposals from Salesforce and Microsoft were submitted to LinkedIn. Salesforce offered $171 per share, while Microsoft offered $172 per share, valuing the company at $ 23 billion.

Finally, to the request for best and final offers for the acquisition of LinkedIn, both companies submitted a revised proposal at $ 182 per share, valuing the company at $ 24.3 billion.

The LinkedIn board followed Hoffman's indication and authorized Weiner to enter into an exclusivity agreement with Microsoft.

On June 5, Salesforce submitted a revised offer based on the closing price of the company's stock the previous day, with a notional value of $200 per share. In light of the exclusivity agreement with Microsoft, Linkedin couldn't pursue the negotiation with Salesforce but informed Microsoft that the current proposal of $182 per share was no longer appropriate. 

Microsoft submitted a revised all-cash proposal at $ 196 per share that the LinkedIn board accepted.

On June 13, Microsoft and LinkedIn issued a joint press release announcing the $ 26.2 billion acquisition.

OUTRO

The LinkedIn board accepted Microsoft’s proposal for five main reasons:

1.         The certainty of value in the cash consideration offered by Microsoft compared to the cash and stock consideration by Salesforce.

2.         The risk that Microsoft might not pursue an acquisition if an agreement could not be reached before the exclusivity period ended.

3.         The board questioned Salesforce's ability to provide LinkedIn with the required resources to explore new growth opportunities after an acquisition representing roughly half of the company's capitalization.

4.         Nadella ensured the independence of Linkedin under Microsoft.

5.         The endorsement by Reid Hoffman of the agreement with Microsoft.

Linkedin's revenues have increased six-fold since the acquisition, from $ 2.2 billion in 2017 to $ 13.8 billion in 2022.