Earlier this month, Microsoft announced it would acquire LinkedIn for $26.2 Billion, valuing the company at 91 times earnings. LinkedIn performance has been lackluster since it’s public debut dropping $11 Billion from its market value in February following lower than expected 2016 revenue forecasts. Despite poor performance, many in the Venture Capital and Technology space argue this acquisition is a good deal for Microsoft. The potential upside is huge given LinkedIn’s domination of the professional social networking space boasting 430m registered users and 100m visitors to its site each month.
The deal signals the growing wave of tech acquisitions and a decrease in IPOs caused by a race for market share between the tech titans (Google, Microsoft, Apple, Facebook and Amazon) and a data grab by these companies. This is good news for startups and investors, providing another route to liquidation in a tough IPO market.
Data is the Golden Ticket for Startups
Microsoft has a poor history with startup acquisitions. Both the $8.6 Billion acquisition of Skype in 2011 and the $7.2 Billion deal for Nokia have failed to add significant value to the company. Nokia is viewed as a $7.2 Billion write off and failure. Since CEO Satya Nadella’s appointment in February of 2014, the company has focused on building out its cloud enterprise services. Nadella joined Microsoft in 1992 and before becoming CEO ran the Cloud and Enterprise group, which is one of the most profitable and fastest growing in the company.
The LinkedIn acquisition is a strategic move by Microsoft to add value to their Office 360 and Dynamics CRM products. In the race to compete with the likes of Salesforce and Google for cloud-based business service domination, Microsoft has added SaaS companies like Yammer and LinkedIn to its portfolio. With both startup acquisitions, Microsoft looks to add significant value for its professional consumers, improving the overall experience for the user. Yammer has yet to be fully deployed across products and it remains to be seen if this will ultimately be a success for Microsoft. LinkedIn is different than any prior startup acquisitions because of the wealth of professional data available.
The acquisition demonstrates a continued trend in the startup landscape towards data over product. In order to compete, it is no longer enough to have a strong product. There must be user data available that makes it easier to automate the process. In Nadella’s letter to employees he discusses the value of the merger, “This combination will make it possible for new experiences such as a LinkedIn newsfeed that serves up articles based on the project you are working on and Office suggesting an expert to connect with via LinkedIn to help with a task you’re trying to complete.”
This deal represents the rise of predictive technology. Companies that have data pertinent to their users will be able to automate the experience and dominate the market. With major innovation happening in the artificial technology space, companies will be able to capitalize on this data in ways not yet imagined.
Look for startups with access to strong user data to be more competitive than those without it. Startups dependent on other companies’ APIs should be cautious as API access continues to become increasingly restricted.
Tech Titans and the Rise of Startup Acquisitions
In recent years, we’ve seen huge mergers across industries including Dell and EMC, Heinz and Kraft Foods, Anthem and Cigna, US Airways and American Airlines. These are just a few in a growing trend of industry consolidations. In order to compete, large corporations are joining forces. In the tech sector, this change is visible through the rise of the tech titans which includes Amazon, Google, Facebook, Microsoft and Apple. In order to dominate the market, these companies must keep a finger on the pulse of the startup world, acquiring startups before they are able to pull from their user base.
Facebook has done a great job at this, acquiring Instagram and Whatsapp. In a failed acquisition attempt, Facebook reportedly offered $3 Billion to purchase a then fledging Snapchat. Based on Snapchat’s most recent $20 Billion valuation it appears that the then 23 year old CEO, Evan Spiegel, made the right decision. The LinkedIn user base is similar to the target audience of Microsoft products and therefore provides a huge competitive advantage. These technology driven startup acquisitions are happening across all industries.
The past several years have proven profitable for tech titans, leaving many with money in the bank. Prominent Venture Capitalist, Marc Andreessen noted last week “For the last three or four years, a lot of the public companies just kind of sat back and watched all the drama play out in the Valley… most of the big tech companies have done very well over the past five years, they’ve piled up lots of cash, and they have to go shopping.” With the LinkedIn/Microsoft merger, look for the M&A floodgates to open.
In an IPO market that has proven unfavorable to tech companies, we will see more startups positioning themselves for acquisition over IPO. Instead of going public being the badge of success, startup acquisitions will take its place.
Final Thoughts On Startups & Exits
According to MoneyTree, the $26.2 billion Microsoft-LinkedIn deal represents more than twice the money that venture capitalists invested in all U.S. startups in the first quarter of 2016. It will be the first of many startup acquisitions as corporations data grab to compete. Industry analysts are predicting a possible Twitter acquisition by Google, which could rival the size of the LinkedIn deal. Speculation shot the struggling Twitter stock up this week. Box, who also suffered a poor public debut, is another candidate for acquisition to watch.
For startups and investors, the outlook is positive, with a viable option for liquidation and success in a poor tech IPO market.