Merger & Acquisition of Microsoft & Linkedin - Case Study Example

MERGER & ACQUISITION CASE ANALYSIS: MICROSOFT & LINKEDIN Student’s Name Course Name Date 1.0 Industry Overview of Target Firm & Bidder The standard industry classification for both Microsoft and LinkedIn is technological sector. The two companies however; operate in two distinct sub-industries. LinkedIn operates in the internet services and social media industry (CSIMarket, 2016). The sales forecast for this sub-sector is set to remain relatively stagnant over the next 2 or so years due to intensive competition and entrance of new companies into the industry thereby decreasing the level of overall market previously enjoyed. On the other hand, Microsoft operates within the computer hardware, software and programming sub-sector. This subsector is characterised by a distinctive earnings outlook with probable estimations of earnings projected to be excess of 33.3%; a factor that is ascertained to result from possible increase in consumer demand as well as robust innovation strategies (CSIMarket, 2016). A horizontal merger is most applicable for the two companies given that they engage in the selling of almost similar products within the same global technological market. The merger between these two companies is necessary in order to cut down on possible levels of competition that might occur now and in the near future. It is important to note that unlike Microsoft, which operates merely within the computer hardware, software and programming subsector, LinkedIn occupies a very specific market niche within the overall social networking and online recruiting sub-industry; a factor that goes way beyond to complicate its industry classification mechanism (CSIMarket, 2016). To effectively, ascertain LinkedIn sector position, it is important to fully understand its revenues streams, which are predominantly emanates from recruiting services as opposed to Facebook and Twitter that rely on advertising income streams. In this regards, it can be safely noted that LinkedIn is an information service provider to the underlying recruiting industry, which makes its major public rivals to be Monster and Dice Holdings (CSIMarket, 2016). According to LinkedIn (2016), the firm faces lots of competition from different quotas and there is likelihood that the level of rivalry will increase intensively going into the future. Particularly so, there is going to be increased level of competition within the market for online professional networks as well as in their respective engagements. A specific niche for which both LinkedIn and Microsoft show lots of rivalry is within the ‘Members-Professional Network’ business segment, which is basically a space for online professional networks that has continued to increase in a more rapid manner (LinkedIn, 2016). Other potential rivals include Facebook; Google; Twitter, are also engaged in the development of solutions that will likely compete with LinkedIn. In fact, taking a closer look at the industry, it can be noted that some of the aforementioned competitors have now increased their partnership strategies with third parties in order to avail products and services that would compete with LinkedIn’s business model (LinkedIn, 2016). A horizontal merger with Microsoft is thus necessary because LinkedIn is also facing intense competition from companies based outside the United States of America that are providing online professional networking solutions. There is a higher level of likelihood that these competitors can go ahead and announce new products; services or even enhancements that perfectly address the ever-changing business environment or those that meets the needs of the customer thereby causing pricing pressures and loss of potential business or decreased member-related operations that would eventually affect business operations. The industry is subject to a substantial number of both local and foreign-based laws and regulations that greatly affect the manner for which conducting business online could be interpreted to affect or even hurt business operations. In both the United States of America as well as in foreign markets, the laws and regulations that directly relates to the liability of providers of online services for operations of their consumers and other related third parties are being tested by a good number of claims that also extends to actions-based on invasion of privacy and other material torts, unfair competition, copyright and trademark infringements and other natures of the advertisements made. In addition to this, the industry is subjected to a possibility of some countries imposing regulations that requires licenses in order to go on within numerous aspects of the business activities as a whole. 2.0 Participants in the Merger For this potential merger, the bidder is Microsoft and the target is LinkedIn. Microsoft is a technological firm that is engaged in the business mission of empowering people and organisation to achieve more by way of developing best-in-class platforms and productivity services for purposes of mobile-first, cloud-first world (Microsoft, 2016). The company was founded in 1975 and operates in more than 100 countries across the globe. It is directly engaged with the development, licensing and supporting of a broad number of software products and services that are able to provide new opportunities; enormous convenience as well as enhance value to potential and existing users. It provides a great deal of services that involves cloud-based services to both individual people and organisations as a whole (Microsoft, 2016). Certainly, it also designs, manufacturers and distribute gadgets that could be fairly be incorporated with cloud-based services while still offering distinct advertising to a global consumer outreach. Some of the most notable products from this bidding company include; operating systems that are vehemently used in potential computing devices; servers and other intelligent devices. It also engages in online advertising solutions (Microsoft, 2016). It is important to note that Microsoft Inc. is a public traded company with its Class A common stock listed in the New York Stock exchange platform under the symbol; MSFT. LinkedIn is the targeted firm that is set to be acquired. It is currently the world’s largest professional network on the internet with more than 400M subscribers in more than 200 countries across the globe (LinkedIn, 2016). It is a public-trading company in New York Stock exchange under the symbol LNKD (LinkedIn, 2016). It was incorporated in 2003 in Delaware under the name LinkedIn Ltd. The firm’s immediate value proposition to its members and thus, customers is focused in connecting to opportunity. The over 400M use the firm’s online platform to remain connected and informed on matters related to their career advancements (LinkedIn, 2016). Many of the products by the company are free to members with the belief that the freemium business model is able to foster more value to the members already within the platform. In return, the member growth and engagements helps to facilitate a network effect that would eventually go forward to benefit each LinkedIn member (LinkedIn, 2016). The important mass of the company’s network seeks to facilitate the creation of value for the members through provision of three distinct product lines; Talent Solutions that extends to hiring, learning and development; Marketing Solution and Premium Subscriptions. These products are sold in offline platform sales organisations that directly engage both large and small enterprise customers as well as an online platform where potential customers purchase specific products on a self-service model. 3.0 Overview of Historical Financial Performance of Microsoft & LinkedIn 3.1 Accounting Performance Microsoft Inc. (MSFT) Year/Ratio 2013 2014 2015 ROA 16.58% 14.02% 7.0% ROE 30.09% 26.17% 14.36% EPS 29.0 1.94 -43.73 Leverage Ratio 1.80 1.92 2.20 Analysis The company return on assets (ROA) and return on equity (ROE) ratio decreases significantly within the three-year operational period. The decrease in these ratios is an indication that the company’s level of profitability has continued to decrease over time and this could be a result of poor pricing strategies for most of its products and services; intense competition from other companies that results to a strained customer-base hence poor sales revenues or even a lack of proper marketing promotional strategies on its part over the period. The earnings per share also decreases significantly over the period from 29.0 to -43.73 in 2013 and 2015 respectively, which is an indication that the level of profits generated from each outstanding share has suffered a major setback. The leverage ratio however; increases over the period from 1.80 to 2.20 in 2013 and 2015 respectively. This is an indication that the company has continued to increase its reliance on debt funds. In fact, this continued overreliance on debt funds is likely a result of poor profits that are needed as retained earnings to propel operations even further. LinkedIn Ltd Year/Ratio 2013 2014 2015 ROA 1.13 -0.36 -2.67 ROE 1.51 -0.53 -4.26 EPS 0.23 -0.13 -1.29 Leverage Ratio 1.28 1.63 1.56 Analysis From the table above, it can be seen that both the return on assets and return on equity ratios decrease significantly to attain a negative value in the period between 2013 and 2015. This is an indication of low sales revenues that are generated from each of the asset and shareholder’s equity held within the period. It could directly be as a result of poor customer subscription into premium solutions of the company or even poor pricing for the products in offer. Consequently, the earnings per share also decrease within the period to a negative value, which confirms a poor profitability position of this company within the period at hand. In fact, it is also as a result of poor profits within the period that the firm is seen to have adopted a need to increases its dependence on debt financing as could be seen by the increase in the leverage ratio within the period. 3.2 Market Performance Microsoft Year/Ratio 2013 2014 2015 Historical stock prices 37.84 40.4 55.09 P/E Ratio 1.3 20.8 -1.25 Market Capitalisation 35.27B 37.12B 51.12B Analysis The historical prices of the Microsoft indicates an increase over the period meaning that potential and existing investors have continued to relate with circumstances happening within the company over the period. The increase indicates that the investors are likely happy about whatever that is happening in the company and that management has remained steady in ensuring the random external factors do not affect the level of operations in any way for the three-year period. The P/E ratio decreases significantly over the period to a negative value of -1.25 in 2015. This is an indication that investors have been affected since more shares are now needed for meeting earnings in these periods. The market capitalisation of the company however increases significantly within the period meaning that lots of shares volumes are being sold to a ready market. It also means that the value of the shares within the stock markets have increased tremendously over the period. LinkedIn Year/Ratio 2013 2014 2015 Historical stock prices 159.89 200.63 180.13 P/E Ratio 36.8 -26.08 -232.37 Market Capitalisation 1.66B 4.48B 5.48B Analysis The company’s historical prices increase over the period from 159.89 to 180.13 in 2013 and 2015 respectively. A high stock price of 200.63 is noted in 2014. This is an indication that LinkedIn’s management has been effective in managing the affairs of the company despite possible external influences. The P/E ratio however; decreases significantly over the period from 36.8 to -139.6, which means that investors have lost significant portion of their shares in the course of paying-off earnings process of the company. The market capitalisation has increased tremendously over the period from 1.66B to 5.48B within the period. This is basically as a result of the improved levels of stock prices over the three-year period that translates to a higher value. It is important that after the merger, the share prices of LinkedIn increased sharply while that of Microsoft decreased as some of the underlying investors in Microsoft were not of the idea of this merging and acquisition process altogether. 4.0 Motivation for Merger Elephant and Salesforce (2016) notes that having the right level of information, organisations can effectively achieve their goals and even make progress in the operational life and this is specifically made possible by having distinct technological information to provide a back-up. Technological information provides a platform for actualising a sustainable competitive advantage, which is an operational strategy. An efficient sustainable competitive advantage provides a fundamental operational strategy that is useful for strengthening and positioning a company within a given business environment (Kansal & Chandani, 2014). Most of the companies have now resorted to implementing a great deal of strategies and resources in order to engage in efficient mergers and acquisitions thereby helping to build on a strong position through making a paradigm shift in new product and service lines. Research indicates that there are a number of reasons for which companies proceed to engage in mergers and acquisitions. They engage in this process since they want to achieve efficient synergies; for diversification purposes, growth as well as a way of improving on their supply-chain pricing power so as to eliminate the degree of competition as much as possible (Elephant & Salesforce, 2016). The merging and acquisition of Microsoft and LinkedIn is basically out of improving operational synergies as well as diversifying their operations into other areas of technological advancements. The move is seen to be going further to attract a great deal of talent in order to formulate their software and therefore, pave their way into the booming social connectivity arena (Kansal & Chandani, 2014). It is important to note that LinkedIn is a tool and service for online recruiters that would help in actualising Microsoft’s Long-term goals and objectives. Keller(2016) notes that the merger was necessitated as a way of helping he two companies involved to achieve efficient growth levels. The two companies seem to experiencing operational overlap that is however; well-complemented by a converging similar strategy. It is should be noted that the acquisition of the professional network firm is likely to benefit from professional cloud that has been one of Microsoft developments into the future (Keller, 2016). LinkedIn is expected to give Microsoft productivity software; social network aspect that has always been lacked while Office and Outlook software already in Microsoft platforms would make it far-much easier to maintain an up-to-date LinkedIn profile. 5.0 Timelines of the Deal On June 13, 2016, Microsoft Corp and LinkedIn Corp made an announcement that they have successfully entered into a definitive agreement for which Microsoft is set to acquire LinkedIn (Microsoft News Center, 2016). The target company is however set to continue enjoying its distinct brand reputation, organisational culture as well as its underlying independence. The current CEO Jeff Weiner will continue being LinkedIn’s CEO and will directly report to Satya Nadella who is the current CEO of Microsoft, Reid Hoffman-chairman of the board, co-founder and controlling shareholder of LinkedIn. The finalisation process of the transaction is expected to take effect at the close of the 2016 operational year. The transaction related to the merger has been fully approved by the Boards of Directors of both companies as the deal is subject to approval by LinkedIn shareholders, the comprehension and a go ahead of specific regulatory approvals as well as other notable customary closing circumstances (Microsoft News Center, 2016). It is expected that Microsoft will be focused on financing the entire transaction fundamentally through the placements of new indebtedness. After the closure of the deal, Microsoft will require LinkedIn financial reports to be portrayed as a section of Microsoft’s Productivity and Business Processes segment. The bidder expects that the entire acquisition process will have a minimal dilution of -1 per-cent to the existing non-GAAP earnings per share for the remainder of the fiscal year 2017 (Microsoft News Center, 2016). It is crucial to understand that the non-GAAP involves a great deal of stock-based compensation expense that is far-much consistent with Microsoft’s reporting practice while it does not include expected effects of the purchase accounting adjustments and possible integration and transaction-related expenses. 6.0 Valuation of the Merger 6.1 Discounted Cash flow Method This is a valuation method that is focused on determining the overall intrinsic value of a company by way of approximating the present values of its overall future cash flows. The variables used in this model include; NOPAT or rather the net operating profit after tax, which is basically a formula used in the course of measuring a company’s overall earnings especially when it is pre-established that it has successfully meet its immediate commitments in clearing its existing debt. It is computed using the formula below; NOPAT= EBIT*(1-tax rate). To effectively ascertain the FCF value of the target company (LinkedIn), the following series of formulas are then used. Free Cash Flow (FCF) = NOPAT – Net Investment on Working Capital (NIOC) NIOC = Operating Capital CURRENT YEAR – Operating Capital PREVIOUS YEAR Operating Capital (OC) = Net Operating Working Capital (NOWC) + Fixed Assets Net Operating Working Capital (NOWC) = Operating Current Assets (CA) – Operating Current Liabilities (CL) It is assumed that the tax rate currently stands at 35% Year 2013 USD (000) 2014 USD (000) 2015 USD (000) EBIT 47,812 36,135 (150,942) Tax Rate 0.65 0.65 0.65 NOPAT 31,077.8 23,487.8 (98,112.3) Free Cash Flow (FCF) Company/ Year Apple 2013 2014 2015 NOPAT 31,077,800 23,487, 800 (98,112.3) Current Assets 2,755,470 4,122,100 3,935,089 Current Liabilities 641,991 882,785 1,188,084 NOWC 2,113,479 3,239,315 2,747,005 Fixed Assets 597,323 1,305,157 3,076,110 OC 2,692,802 4,544,472 5,823,115 NIOC 1,851,670 1,278,643 FCF 21,636,130 (99,390,943) 6.2 Relative Valuation Method This comprise of a method that is adopted in valuation process of a company in order to enhance a comparison of its immediate share value to that of its underlying competitors so that there can be an easy determination of its overall financial worth. For this case, the most viable relative valuation method will be Price/Earnings ratio (P/E) for LinkedIn in the period between 2014 and 2015. Year/Ratio 2014 2015 P/E 200.63*(0.13)= -26.08 180.13*(1.29)=-232.37 6.3 Cumulative Abnormal Return for Microsoft The major announcement was made in June 13, 2016 and now the cumulative abnormal return computations will cover the range between June 4, 2016 and June 12, 2016. 7.0 Defences & Strategies Deployed by Bidder & Target Firm Microsoft sole strategy in acquiring LinkedIn lies in the fact that it paid more; at $26.2B all-cash deal for $196/share. This purchase goes down in history as the largest in technological sector. However, Microsoft justified this purchase through a number of reasons that include; first, it set to achieve an enterprise focus given that it is known for its desire to own the enterprise software space hence LinkedIn will successfully provide Microsoft with valuable products and services that it could use to recruit employees and, also allow them data and insights into users, which is indeed advertising network. Secondly, it seeks to achieve production innovation through the upgrading of LinkedIn website features hence provide a valuable data and network effects. Third, Microsoft is seen to be boastful of being acquisition heavy. In fact, as at 2016, prior to the announcement, the company had about $108B overall cash, cash equivalents as well as short-term investments hence it means that it showed its masculinity in terms of offering unrivalled cash amounts related to the purchase. The defence strategies adopted by LinkedIn in order to push for an enormous purchase price relatively relates to its underlying level of strengths. For instance, it can be established that the firm enjoys quite a unique product as it has been successful in organising what used to be informal and intangible processes into a much user-friendly professional networking platform with more than 433M subscribers across the globe. The company also provides a viable software space cloud that Microsoft has been focusing for a long time now hence, since this readily provided by LinkedIn, then a huge price is expected to be paid for the acquisition and merger process. Consequently, LinkedIn has successfully ascertained that there is indeed a strong demand for both local and international-based markets for its professional products and services hence an opportunity for growth, which would be offered to Microsoft at a relatively premium price. 8.0 Advantages & Disadvantages for Microsoft Acquiring LinkedIn The advantages of this acquisition process lies in the fact that Microsoft is set to increase its overall revenue stream. It has been noted that Microsoft has been in the process of expanding into cloud space business segment hence the process of acquiring LinkedIn would propel this objective into bringing in even more revenues in the future. Another benefit of the acquisition lies in achieving a rapid diversification strategy that would go way above protecting its operations from risk related to over-relying in a single form of business operations especially with the ever-changing business environment within the technological sector and high levels of competition. The sole disadvantage of this acquisition process lies in the presumption that most M&A process fail within a short period of closing the deal. There is a high likelihood that the merger might not work especially since these companies operate on an overlapping business strategy. 9.0 Post-Acquisition Performance Taking into consideration that the bidder engaged in paying a premium price for a company that was already operating on losses, it then means its accounting position will be affected. The impacts of the losses made by LinkedIn being reported within a specific business segment of Microsoft means that it will greatly affect is overall profitability levels as the bidder revenues will be utilized in offsetting accruing expenses incurred by the company. This will have a major impact on the overall operations of the company and would likely push potential investors in the stock markets from purchasing or even trading with the company. It is important to note that investors will always engage a profitable company hence a possibility of the bidder’s revenues falling will likely result to investors desisting from analysing and making investments into the company in the future. References List CSIMarket. 2016. Internet Services & Social Media Industry. Accessed from http://csimarket.com/Industry/Industry_Data.php?ind=1005 Elephant, W.B.S.L. & Salesforce, W.W.A., 2016. The Super Giants of Tech: M&A Activity. Kansal, S. & Chandani, A., 2014. Effective management of change during merger and acquisition. Procedia Economics and Finance, 11, pp.208-217. Kelleher, K. 2016. ‘Why Microsoft is spending $26B on LinkedIn’. Times. Accessed from http://time.com/4367134/microsoft-linkedin-buy/ Microsoft News Center. 2016. ‘Microsoft to acquire LinkedIn’. Accessed from https://news.microsoft.com/2016/06/13/microsoft-to-acquire-linkedin/#cBeoYlOASjumCPm3.97 Microsoft. 2016. 2015 Annual report. Accessed from https://www.microsoft.com/investor/reports/ar15/index.html MorningStar. 2016. Microsoft: Key Ratios. Accessed from http://investors.morningstar.com/ownership/shareholders-overview.html?t=MSFT®ion=usa&culture=en-US Google Finance. 2016. LinkedIn Corp: Financials. Accessed from https://www.google.com/finance?q=NYSE%3ALNKD&fstype=ii&ei=VCYgWfmtN9bHswHa7qSwCg LinkedIn. 2016. 2015 Annual report. Accessed from https://s21.q4cdn.com/738564050/files/doc_financials/annual/2015/LinkedInAnnualReport_2016.PDF Yahoo Finance. 2017. Historical Prices: LinkedIn. Accessed from https://finance.yahoo.com/quote/MSFT/history?period1=1465074000&period2=1465678800&interval=1d&filter=history&frequency=1d Read More