Technology

Microsoft to buy networking site LinkedIn for $26.2b

Robert Galbraith/REUTERS/file 2013

When LinkedIn was launched in May 2003, a dozen employees in the Silicon Valley startup began an office pool to guess how many members would sign up in the first week. The dot-com bust still hung over the startup world, but the LinkedIn team was bullish: All but one overestimated its first-week signups.

“Classic entrepreneur over-optimism,” Lee Hower, one of those founding employees, recalled with a laugh. “We suffered from it, too.”

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But that optimism has been rewarded 13 years later, with Monday’s $26.2 billion offer by Microsoft Corp. to purchase LinkedIn Corp., which after getting 2,708 members in that first heady week can now claim a whopping 433 million users.

Pairing with Microsoft, Hower said, may help LinkedIn realize the founders’ original ambition: to become an indispensable software tool that professionals use every day, to find sales leads, hunt down suppliers, and perform other critical business tasks.

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Despite becoming a popular networking site and the de facto repository for digital resumes, LinkedIn still suffers from a half-hearted embrace by its members. Fewer than a quarter use it at least once a month. The social networking leader, Facebook Inc., reports 1.65 billion people use its service monthly.

“LinkedIn is a tool that’s used on a daily basis for some professionals, but certainly not for every professional,” said Hower, now a partner at the Boston venture capital firm NextView Ventures. “I think being a part of Microsoft can enable that to happen.”

The acquisition is the largest in Microsoft’s history, and chief executive Satya Nadella said LinkedIn’s audience — and the troves of data it collects on those members — would help his company reinvent workplace software. Customers using any of Microsoft’s many software products, from e-mail to sales management, could tap into detailed histories of customers and business associates through their LinkedIn profiles, which could be accessible in every program.

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Under terms of the acquisition, LinkedIn would remain an independently managed company, with chief executive Jeff Weiner reporting directly to Nadella.

Among social-networking sites, LinkedIn’s business model has always been unique. Unlike Facebook, Twitter, or Instagram, Hower said, LinkedIn was never meant to be a consumer entertainment service that would be subsidized with advertising.

“We didn’t even talk about advertising being part of the business model because we didn’t realistically think that could work,” Hower said.

Instead, LinkedIn makes most of its money by selling monthly software subscriptions to companies that want to tap into the rich stream of data that LinkedIn has gathered about employees and potential job recruits. In the first quarter, those services brought in 65 percent of LinkedIn’s revenue — $558 million.

“It was always this weird animal,” said Jeffrey Glass, who in 2008 led Bain Capital Ventures’ investment in LinkedIn.

In some ways, it was even built to be boring. Early versions of the product didn’t allow photos to be added to digital resumes, a conscious decision meant to emphasize that LinkedIn was all about doing business and not making casual connections, Hower said.

That focus on the workplace could make LinkedIn a good fit with Microsoft, Glass said, because the larger company thrives on selling e-mail, spreadsheets, and other software that makes white-collar work possible. Moreover, LinkedIn would get access to data about Microsoft’s even larger population of software users, which in turn could attract more subscribers to its personnel and recruiting software, the companies said Monday.

“Microsoft has always thought LinkedIn was interesting,” said Glass, now chief executive of the investment firm StartingFive Partners. “And there were always relationships and product discussions — how do you integrate LinkedIn better with Outlook?”

Perhaps the most important benefit to LinkedIn is Microsoft’s size. In his memo to employees, LinkedIn’s Weiner noted that the largest tech companies have become so massive that surviving at a fraction of their scope has become much more difficult.

And tellingly, Weiner noted that Facebook, founded in a Harvard dormitory less than a year after LinkedIn began, today has annual revenue of about $18 billion.

“Imagine a world where we’re no longer looking up at Tech Titans such as Apple, Google, Microsoft, Amazon, and Facebook,” he wrote, “and wondering what it would be like to operate at their extraordinary scale — because we’re one of them.”

Curt Woodward can be reached at curt.woodward@globe.com.Follow him on Twitter @curtwoodward.
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