How LinkedIn Acquisition Will Help Microsoft?

+0.39%
Upside
417
Market
419
Trefis
MSFT: Microsoft logo
MSFT
Microsoft

Microsoft (NASDAQ: MSFT) and LinkedIn (NYSE: LNKD) on Monday announced that they have entered into a definitive agreement under which Microsoft will acquire LinkedIn for $196 per share (a premium of 50% based on Friday’s closing price) in an all-cash transaction valued at $26.2 billion, inclusive of LinkedIn’s net cash. The deal is the third-largest acquisition in the technology industry, behind Dell-EMC ($67 billion) and Avago-Broadcom ($37 billion). The deal will be financed through the issuance of new debt, which should help Microsoft balance its capital structure. The deal also has cost synergies worth $150 million and will have a minimal negative impact—about 1%—on adjusted earnings for its fiscal 2017 and 2018 years. The deal is expected to be accretive to Microsoft’s non-GAAP earnings per share in Microsoft’s fiscal 2019.

This acquisition also falls in line with Microsoft’s strategy of bolstering its cloud business and countering the threat of rising Chromebook sales, which is cannibalizing sales of Windows-based PCs.  In this note, we explore these factors in detail.

How Will Debt-Fueled Acquisition Help Microsoft’s Capital Structure?

Relevant Articles
  1. Up Nearly 70% Since The Beginning Of 2023, Where Is Microsoft Stock Headed?
  2. Up 63% Since The Beginning Of 2023, How Will Microsoft Stock Trend After Q2 Earnings?
  3. Microsoft Stock Is Up 45% YTD And Outperformed The Consensus In Q1
  4. Microsoft Stock Outperformed The Expectations In Q4
  5. Microsoft Stock Is Fairly Priced At The Current Levels
  6. What To Expect From Microsoft Stock In Q3?

Microsoft will finance this deal through the issuance of new debt. This should help the company lower its weighted average cost of capital (WACC), as it currently has less than $50 billion of total debt, compared to a nearly $400 billion market value of equity. We estimate the company’s cost of equity at around 7.5%, while its average cost of debt is less than 2.5%. While the cost of debt is likely to increase following the deal, due to the higher debt load and subsequent risk of a credit rating downgrade as well as rising interest rates, it will still remain substantially lower than the cost of equity. Accordingly, Microsoft’s cost of capital should decline fairly significantly.

What Microsoft Is Trying To Achieve?

With the advent of cheaper Chromebooks and the secular decline in PC hardware sales, the PC hardware industry is mimicking the trends in Smartphone industry. Like in the smartphone industry, the hardware is being largely commoditized and the sale of a device is depending more and more on the number of products and services available to users on the operating system.

Through the cloud, Chromebook has access to over 2 million apps available through the Google play store. For Microsoft to hold on to its dominant share in the PC Operating System (OS) space and deal with the threat of the advancing Chromebook, it needs to improve its app library and improve the services that it is offering to its existing users.

One way for Microsoft to ensure that it continues to dominate the industry is to further improve its enterprise offerings. It plans to offer a wider range of products for the productivity suite, which currently has a total addressable market (TAM) of $200 billion, according to the company. LinkedIn, which has a TAM of $115 billion, can be bundled with Microsoft’s productivity suite, boosting its TAM by offering a differentiated experience to its clients. LinkedIn not only ties in neatly with Microsoft’s existing product line, but also adds value to over 300 million Windows users, 1.2 billion office users and 8 million paid Dynamics CRM users.

Have more questions about Microsoft? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Microsoft

Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap |More Trefis Research