LNKD Linkedin Corp. Class A

By Jay Greene 

Microsoft Corp. agreed to buy LinkedIn Corp. for $26.2 billion, in a bet the professional social network will give a jolt to the software giant's widely used Office portfolio of productivity applications.

The deal -- the largest in Microsoft's history -- is CEO Satya Nadella's latest move to revitalize a company that was viewed not long ago as left behind by shifts in technology. Mr. Nadella is betting the deal will open new horizons for Microsoft's Office suite as well as LinkedIn, both of which have saturated their markets, and generally bolster Microsoft's revenue and competitive position.

Mr. Nadella said in an interview on Monday that "work today is split" between tools workers use to get their jobs done, such as Microsoft's Office programs, and professional networks that connect workers. The deal, he said, aims to weave those two pieces together.

"It's really the coming together of the professional cloud and the professional network," Mr. Nadella said.

For instance, connecting Office directly to LinkedIn could help attendees of meetings learn more about one another directly from invitations in their calendars. Sales representatives could pick up useful tidbits of background on potential customers from LinkedIn data.

Microsoft also sees opportunities in Lynda.com, a channel for training videos that LinkedIn bought for $1.5 billion last year. Microsoft will be able to offer Lynda's videos inside its own software, such as Excel spreadsheets.

Mr. Nadella also talked about adding data from LinkedIn to its Cortana digital assistant.

Microsoft will pay $196 per LinkedIn share, a 50% premium to the social network's closing price on Friday. Both boards approved the deal, and Reid Hoffman, LinkedIn's chairman and controlling shareholder, supports the transaction. The companies expect the deal to close by the end of the year.

The tie-up will also test Microsoft's ability to meld a large acquisition with its own operations. Redmond has struggled to integrate previous purchases including Nokia Corp.'s handset business and aQuantive Inc., costing shareholders billions of dollars in the process.

As for LinkedIn, it lends hope to renew stalled growth as well as an exit for shareholders after the stock tumbled from a peak of $269 in February 2015 to as low as $101.11 last February.

LinkedIn's growth has stalled as advertising has struggled. Customers who have purchased the company's recruiting products have been leaving as well. The tie-up represents an opportunity to jump-start growth by tapping into the vast reach of Office, used by more than 1.2 billion customers.

LinkedIn Chief Executive Jeff Weiner, who will remain with the company in the same job, said the deal provides "a meaningful acceleration of the scale at which we operate."

Perhaps the biggest challenge for Microsoft will be digesting LinkedIn. The deal dwarfs every other acquisition the company has made. Microsoft's next largest deal, buying the Nokia handset business, has been disastrous, with the company largely unwinding the last pieces of that division, taking charges that slightly exceed the $9.4 billion Microsoft ultimately spent to buy the business. That deal was orchestrated in 2014 by Microsoft's previous chief executive, Steve Ballmer.

"Sadly, history has shown [synergies] are very difficult to realize when two big companies combine, especially to the extent LinkedIn is remaining an independent fiefdom within the Microsoft empire," said Mitch Kapor, founder of Lotus Development Corp. and partner of venture firm Kapor Capital.

The deal highlights Mr. Nadella's bid to reshape Microsoft, a little more than two years after taking the helm. Mr. Nadella, who rose through Microsoft's ranks in its business applications and server groups, has focused much of the company's efforts on products and services for corporate customers.

As CEO, he extended Microsoft's software to platforms that it doesn't control, including Android mobile phones and the Linux desktop operating system. And he has pushed to connect Microsoft's products to data sources that can provide customers with timely, useful information, and to develop services that rely on emerging technologies such as machine learning that attempts to anticipate information users want and actions they'll take.

Microsoft's efforts at weaving social networking into its workplace products haven't caught fire. In 2012, Microsoft bought workplace chat service Yammer Inc. for $1.2 billion, but has seen rival products, such as Slack, gain momentum.

Growth has been a challenge for both Office and LinkedIn. In the quarter that ended March 30, Microsoft's Productivity and Business Processes unit, which includes its Office products, grew 1% to $65 million.

Growth at LinkedIn has decelerated in the last two years. UBS UBS Securities LLC analyst Brent Thill estimates that LinkedIn revenue will climb a bit more than 25% in 2016, down from more 35% growth in 2015 and more 45% growth in 2014.

Morgan Stanley served as Microsoft's financial adviser to Microsoft, and LinkedIn was represented by Qatalyst Partners and Allen & Co.

Following news of the acquisition, Moody's Investors Service said it would review Microsoft's triple-A credit rating for a potential downgrade. Moody's said the only companies that hold its triple-A rating, which indicates pristine credit quality, are Microsoft, Johnson & Johnson and Exxon Mobil Corp.

Mr. Weiner said that, after the deal concludes, salespeople who use Microsoft's Dynamics customer-relationship management program will know more about potential targets including their background, co-workers, and other business contacts, "turning cold calls into warm prospects."

Those opportunities should help Microsoft generate revenue from LinkedIn's professional network that LinkedIn couldn't independently, said Stifel Nicolaus & Co. analyst Brad Reback. That could increase the value of Office to customers, and helps explain why Microsoft made the deal.

"They are paying a full price, but they are not paying an egregious price," Reback said. "It's worth the bet."

Write to Jay Greene at Jay.Greene@wsj.com

(END) Dow Jones Newswires

June 13, 2016 16:25 ET (20:25 GMT)

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