Microsoft’s core PC business of office applications and Windows operating systems is in decline so it needs new sources of revenue. It is splashing out $26B to buy social media business LinkedIn. Will this move add value for Microsoft shareholders or destroy it? The omens are not good.
Business leaders love to flex their muscles and use shareholders’ funds to buy other businesses. This is despite the evidence that most acquisitions do not fulfill their stated aims and many lose money hand over fist. This is especially true in the high-tech sector which has a catalogue of failed mergers. The most notorious example was the purchase of Time Warner by AOL in 2001 for a massive $164B. It was a catastrophe which ultimately sank both companies and has been described as the biggest mistake in corporate history. The two companies demerged in 2009.
Microsoft’s track record in this field is worryingly poor. In 2013 their then CEO Steve Ballmer spent $7B acquiring Nokia’s mobile phone business when it was clear that Apple and Android were killing all other competition in the sector. Within two years most of the acquired staff were laid off and Microsoft took a $10B write-down. This disaster followed Ballmer’s purchase of aQuantive for $6B in 2007. It was an attempt to take on Google in online advertising and it failed. In 2012 the value of the business was written down to zero. In 2008 in another attempt to take on Google Microsoft offered $45B for Yahoo. Fortunately for Microsoft the bid was rejected and the company dodged a bullet. Yahoo’s online advertising business is worth very little today.
But Microsoft is not alone in this folly. Google themselves splurged $12B on Motorola’s mobile phone business which they then sold three years later for less than $3B. Hewlett Packard spent $11B acquiring Autonomy but had to write off most of that within a year. Facebook spent a remarkable $19B buying WhatsApp – and it is too early to tell if that is money well spent.
To be fair to Microsoft, their $8B acquisition of Skype may prove to be a winner. But despite some successes the question remains; why do companies keep acquiring when the evidence shows that the strategy generally does not work? In the case of LinkedIn Microsoft gets a business which has 430 million members and a database of information which is rich in detail. Microsoft’s CEO, Satya Nadella, is betting that his firm can find synergies between this data and Microsoft’s applications.
LinkedIn is the premier social network for business professionals and it is the essential tool of all recruitment companies. However, LinkedIn”s growth has slowed and it is losing money. Is it tomorrow’s success or yesterday’s? Microsoft has paid a huge premium for the business and shareholders must be worried that it will add to the company’s litany of failures.