HIAWATHA BRAY | TECH LAB
Ritchie B. Tongo/European Pressphoto Agency
Microsoft Corp. is about to buy itself about 400 million new friends, the kind with businesses to run and money to spend.
Microsoft said Monday that it will buy the business-oriented social network LinkedIn for $26.2 billion. It’s by far the biggest acquisition in Microsoft’s history, and it will give the company that Bill Gates built a major social platform, although one not as big as mighty Facebook.
But LinkedIn isn’t for posting cat pictures. It’s the social network of choice for entrepreneurs and corporate executives. And that’s why it may make a good fit for Microsoft, the world’s dominant provider of business software and services, as Microsoft aggressively moves into the lucrative world of cloud computing.
Think the Business Network, not the Social Network, as the addition of LinkedIn’s vast amounts of data makes Microsoft’s corporate software products more powerful.
For example, a saleswoman using Microsoft’s sales software could get an instant readout on the careers and interests of every executive she’ll meet on her next call, and search for potential new leads among all their friends. There’s no easy way to do that now.
LinkedIn is “where we have our professional lives,” said Jeffrey Hammond, principal analyst at Forrester Research in Cambridge. “It’s data that is highly unique and . . . is not easily replicated.”
Suddenly, Microsoft has access to more than 400 million LinkedIn users. About 100 million of them log on every month to its free and subscription services — and nearly all of them are serious business people.
Douglas MacDougall, managing partner of MacDougall Biomedical Communications, a biotech-focused public relations company in Boston, said that LinkedIn Premium is his favorite tool for making contact with the industry’s most powerful players. MacDougall calls his monthly LinkedIn subscription “the most valuable $50 a month I’ve spent in the past four years.”
But that’s just a fraction of LinkedIn’s business. Most of the Mountain View, Calif., company’s revenue comes from its “talent solutions” division, which sells recruiting services for businesses on the hunt for employees.
In the first quarter of 2016, this division posted revenue of $558 million, up 41 percent over the year-earlier quarter.
The company had total sales of $861 million.
LinkedIn shares rose as high as $258 last fall. But the company suffered a 43 percent beat-down in February, after predicting less than spectacular growth in 2016.
A first-quarter report that beat Wall Street’s expectations led to a modest rebound, but to many investors, the company’s future still looked uncertain.
News of the deal sent LinkedIn’s stock up 47 percent to $192.21, just under Microsoft’s $196 per share offer.
Shares of Redmond, Wash.-based Microsoft declined 2.6 percent to $50.14, which is not unusual when a company announces a big acquisition.
There’s no guarantee the deal will work.
“Microsoft doesn’t have a great record with large acquisitions,” warned David Yoffie, a professor at Harvard Business School. There was the disastrous $7.2 billion acquisition of smartphone maker Nokia in 2013, and the 2007 deal to buy aQuantive, a failed foray into online advertising.
Yet Microsoft has been executing a remarkable turnaround under chief executive Satya Nadella. The company has shrugged off its stillborn efforts to challenge Apple and Google in mobile phones. It has smartly pivoted away from the disastrous Windows 8 operating system; through enticements and constant goading, it’s gotten more than 300 million people to switch to its new Windows 10 operating system in the past year.
But to understand what the LinkedIn deal could portend, take a look at Azure, Microsoft’s booming business in cloud computing services.
Just as Microsoft lagged behind in smartphones, Internet search, and social networking, the company was slow to see the vast potential profits to be had by allowing customers to do their computing tasks online, using software running at remote data centers. Amazon.com figured it out back in 2004, and that company’s AWS cloud business is now the world’s biggest.
Microsoft has usually been lousy at playing from behind. Not this time. The company launched Azure in 2010, and it’s been booming ever since, increasing revenue 120 percent in the third quarter, which ended in March. Today, it’s number two after Amazon. In just six years, from a standing start, Microsoft has become a cloud-computing giant.
At present, companies mainly use Microsoft’s cloud to host their own software and online services. The big push now is to get businesses to use Microsoft’s cloud-based services. The company has scored with Office 365, which delivers online access to venerable Microsoft programs like Word, Excel, and PowerPoint. Microsoft has sold over 22 million annual subscriptions to Office 365 to consumers, up 77 percent from last year, and more than 70 million to businesses.
But “they really don’t have much of a cloud services business outside of Office 365,” said Yoffie of Harvard Business School. For instance, Microsoft’s Dynamics CRM, a cloud-based program for managing business-to-business sales relationships, is making little headway against products from industry leader Salesforce.com, Yoffie said.
A deal with LinkedIn could change that by providing users of that Microsoft program — and its other tools used in the business world — with information about potential customers.
“LinkedIn essentially becomes the social fabric across all of Microsoft,” CEO Nadella said during a conference call on Monday.
Some LinkedIn customers might be a little nervous about Microsoft’s plans for all that personal data they’ve shared over the years.
“I will probably read their terms and conditions really carefully,” said MacDougall, who doesn’t want to be swamped with marketing pitches from Microsoft.
But Nadella offered reassuring words about privacy.
“Nothing gets linked and nothing gets connected without customers opting in,” he said. “As we do deeper integration, customers will have more value, but customers will be in control.”
Microsoft has good reason to avoid alienating millions of influential LinkedIn users. Still, there’s a lot of money-making data locked up inside those LinkedIn profiles. And now Microsoft’s in a position to squeeze out every dime.
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