Microsoft Is Buying LinkedIn for $26.2 Billion. Can That Get It Back Into Your Daily Life?

Missing the mobile market pushed Microsoft further away from ordinary consumers. Satya Nadella is trying to build a new Microsoft after Bill Gates and Steve Ballmer, and buying LinkedIn is only one part of that attempt.

As if to steal Apple's thunder, Microsoft announced its big move hours before Apple's annual WWDC opened.

The company, already voted Silicon Valley's most aggressive shopper last year, is about to buy the professional networking site LinkedIn for $26.2 billion in cash. That is more than three times what Microsoft paid for Skype in 2012, and nearly three times what it paid for Nokia.

LinkedIn is the largest professional networking site in the world. It was founded in 2002, listed on Nasdaq in 2011, and now has 433 million registered users worldwide.

LinkedIn founder and chairman Reid Hoffman and chief executive Jeff Weiner have both approved the deal. After the acquisition LinkedIn will keep operating independently, with Weiner staying on as CEO. He will report to Nadella himself rather than to Microsoft's board, which leaves LinkedIn relatively independent inside Microsoft — much like YouTube inside Google, or WhatsApp and Instagram inside Facebook.

Allen Blue, LinkedIn's current head of product, told QDaily in an interview a month earlier: "Right now LinkedIn's goal is to get every working person involved." He admitted at the time that the platform still had room to grow, both in the range of professions on it and in the number of people.

Microsoft, for its part, thinks LinkedIn is a good platform for getting more out of the work software it already has. CEO Satya Nadella put it this way: "Our combination will accelerate the growth of LinkedIn, Office 365 and the business software Dynamics — we are committed to empowering every person and every organization on this planet."

"This deal brings together the world's leading professional cloud with the world's leading professional network," he said.

There was plenty of similar grand talk. LinkedIn CEO Jeff Weiner said the acquisition "has the opportunity to change the way the world works." LinkedIn founder Reid Hoffman called it "LinkedIn's moment of rebirth."

This really is the biggest acquisition of an internet company Silicon Valley has ever seen. The last comparable deal goes back to 2014, when Facebook bought the messaging app WhatsApp for $19 billion, setting a record of $345 million per employee.

At the end of 2015 Microsoft held $102.6 billion in cash, second among American companies behind only Apple. Even so, Microsoft expects the deal to cut its earnings per share by 1% for the rest of the year.

In the months before LinkedIn's 2011 listing, Microsoft approached the company several times to talk about buying it. Microsoft's first offer was $500 million; its last offer before the IPO was close to $2 billion. LinkedIn's revenue then was only $70 million.

In October 2014 Business Insider worked out what buying LinkedIn would have cost Microsoft at that point, and put the figure at no less than $35 billion. Seen that way, Microsoft is not losing much on today's deal. In any case, after several years of flailing, Microsoft has finally bought itself a successful social network.

LinkedIn: From a Product for Searching People to the Second-Biggest SaaS Provider

Counting SocialNet, the not very successful company he founded in 1996, this was the third startup for Reid Hoffman and his PayPal Mafia. In 2002 they sold PayPal to eBay for $1.5 billion; Hoffman was PayPal's vice president at the time, and Allen Blue, now LinkedIn's head of product, was PayPal's chief operating officer.

Thirteen years ago, when LinkedIn was just getting started, the dot-com bubble had burst less than two years before. Raising money then was harder than it is for founders today.

LinkedIn first cast itself as "a search product about people."

"When we started discussing the concept, LinkedIn was going to be the third company we founded together," Blue told QDaily. "At that time we knew that one thing that makes a startup succeed is hiring people who have worked with you before. In the same way, when you have a question you go to someone you know, and they introduce you to the person who knows the answer."

They soon found that the network could not do its job unless it gathered enough professionals. In its first week online only 2,500 people signed up. The founding team tried everything. Blue told QDaily: "In 2003 and 2004 we were under enormous pressure. What we faced was grow or die."

Two years after launch LinkedIn passed 2 million registered users, and the people in charge of hiring at companies started coming to ask about it. "That was when we knew we had turned LinkedIn into a business," he said.

LinkedIn's revenue now comes mainly from three places: recruiting, marketing solutions, and premium subscriptions sold to individuals. And LinkedIn is no longer only a place to search for and add people you know.

"Really, all of it is about how people inside a company reach people outside it," Blue said.

People use LinkedIn to find others, share content, talk to each other and look for new work. Marketing people use it to find prospects, and company recruiters often treat it as a main hiring channel.

Blue explained: "The people who use LinkedIn in their daily work are usually recruiters, salespeople, business development people and journalists. That is a very powerful part of LinkedIn, and it is also what decides whether we succeed."

Besides the website, LinkedIn has a whole set of products: Lookup, for networking among colleagues inside a company; Lynda, an online education platform for job-skills training; and LinkedIn Students, a standalone app built for students looking for work.

It was in that same interview that Blue said he was not satisfied with the number of professionals on LinkedIn. Their target, he stressed, was "everyone."

Why Sell LinkedIn?

The most obvious reason is that the company wanted a bigger force behind it to expand its user numbers. CEO Jeff Weiner was more specific in an internal email on Monday: "Our vision is to create economic opportunity for every member of the global workforce."

But there is a practical reason to be bought by a big company too: LinkedIn was tired of working alone in the competitive landscape it faced.

Weiner said in the same email: "Imagine a world where we no longer have to look up at tech giants like Apple, Google, Amazon and Facebook, no longer have to wear ourselves out coping with a market whose competition people understand better and better, and no longer have to change the way we reward people because of pressure from the share price."

LinkedIn's stock rose 50% after the Microsoft deal was announced. But it is worth noting that over the past year the stock had moved between $98.25 and $258.39. Even after the 50% jump, it was still some way below its high.

As an independent internet company, LinkedIn faced pressure from several directions.

Asked who its competitors were, Blue said Facebook was not a direct one. "Their main energy still goes into social," he explained. "And the traditional recruiting sites tend to focus on more basic positions, like retail jobs or blue-collar work, while we focus on recruiting high-end professionals, so they are not direct competitors either."

But LinkedIn's position could hardly be called commanding. BranchOut, a social job-search site built on Facebook's open interfaces, had just announced that it had reached 300 million registered users. BranchOut launched in 2010 and let users find Facebook users with similar backgrounds. With Facebook's user base under it, BranchOut grew clearly faster than LinkedIn.

Facebook itself was also testing Facebook for Work.

Pressure from the capital markets was another side of it. Over the past year LinkedIn's performance fell short of what the markets expected, and at one point its share price was cut in half — though some people explained the fall by saying the company "doesn't know how to sell a dream."

QDaily once asked Blue which business would drive LinkedIn's next stretch of growth. For now, he said, marketing solutions and recruiting services would both keep growing. Lynda was new, but a great many companies need to train their employees well, and LinkedIn can reach those companies easily. "We believe this will be a strong growth engine in the future."

"On top of that we have sales solutions, the internal referral program, Lookup and a series of new products. As long as two or three of them take off, there is nothing to worry about," Blue told QDaily.

He also mentioned the trouble caused by slowing growth in the smartphone market, which means companies like LinkedIn have to follow Facebook into places where the network is poor, such as India. "If the network there doesn't improve, then we'll bring the network to India," Blue said.

When it comes to building infrastructure, LinkedIn clearly has no advantage. Over the past few years Microsoft, like Facebook and Google, has started putting money into infrastructure; the billion-plus people not yet online are future users too. This is an internet land grab, and the question that remains is how to plug these companies' existing services into that infrastructure.

Now that Reid Hoffman has once again sold a company he founded, the arrangement of power among Silicon Valley's tech giants has changed.

Microsoft's Most Basic Strategy Has Changed Since the Nadella Era Began

In January 2012 Microsoft's then CEO Steve Ballmer insisted: "Nothing at Microsoft is more important than Windows." In the two years since Nadella took over as CEO, the traces of the Ballmer period have been almost completely washed away. Windows is no longer the center of Microsoft's universe; the company now puts more into mobile devices, cloud computing and productivity software.

Ballmer once laughed at the iPhone in a television interview. Nadella did the opposite, pushing a strategy built on productivity tools: "mobile first, cloud first." Over two years under him, Microsoft has bought startups to become a heavyweight developer for Apple, and worked hard to put its Office software on Apple and Android devices — even though both kinds of device have eaten into Microsoft's influence.

In the past six months Microsoft launched its own laptop, the Surface Book, and abandoned the Windows Phone business entirely. Today's Surface is no longer a vehicle for pushing Windows and Office. It is a product Microsoft controls from software to hardware, aimed like Apple's Mac at the high-end office market. In a future where the PC market shows no sign of recovering, the money Surface brings in will be what drives Windows forward.

More important, Microsoft has finally made some headway in the mobile market it had tried and failed at so many times.

At the end of 2014 Microsoft bought the email app Acompli. Two months later the app came back with a new face and a new name — Outlook — in Apple's app store, and quickly became one of the best email apps on iOS.

Next, in February 2015, Microsoft took the Sunrise calendar in hand. Sunrise was already a popular calendar app on iOS before the deal; its ability to pull a user's records from elsewhere into the calendar automatically was very convenient.

In mid-2015 Microsoft bought 6Wunderkinder GmbH, the team behind the cross-platform productivity app Wunderlist. Early this year SwiftKey — the company that helped the physicist Stephen Hawking improve his input method — was bought by Microsoft for $250 million.

Everyone knows Microsoft keeps drifting further from individual consumers, but that does not stop this cash-rich giant from closing the distance by buying. Backed by enterprise services like Office, server software and cloud computing, Microsoft is still a financially very healthy company; what people fault it for is innovation and vitality.

Clearly, buying LinkedIn gives Microsoft a bit more to imagine, or Nadella would not have written in his open letter that "this deal is key to reaching our goal of reinventing productivity and business processes." Can you tell what he is saying? What Nadella hopes is that LinkedIn's network will connect the professional information in its social graph with the information inside Office 365 and Dynamics.

A document finished in Office 365, for instance, could be shared straight to a LinkedIn contact. Bloomberg's comment was blunter: LinkedIn's users need some reason to open it more often instead of remembering it only when they change jobs, and the scattered productivity tools Microsoft owns also need one working system to hold them together.

The most obvious thing the two companies have in common is that what each of them does is tightly bound to work.

The Acquisition Isn't the Problem. What Happens After It Is

With Nokia as the warning from history, no one knows yet how much of LinkedIn's life a big company will use up, even if it keeps operating independently.

During Ballmer's tenure, Microsoft bought Nokia for $9 billion. Over the time it took to slowly fold Nokia in, most of Nokia's employees left Microsoft. In the rounds of layoffs and reorganization that followed, both the Nokia brand and Microsoft's phone hardware business died off.

Skype, bought in 2011, is not a good example either. In 2011 Microsoft paid $8.5 billion for it.

For the first few years after the deal Skype still sat outside the Windows and Office products, and since users did not depend on Skype much, the acquisition did not do much good. Only in the past year has Skype been substantially redesigned. Today Skype has become part of the way of living Microsoft imagines: the plan is to put Skype everywhere.

Microsoft has already folded Skype's video, voice and instant messaging into Windows 10, so you can get an experience like the internet messaging app iMessage or the video chat app FaceTime on an iPhone. It is just that Skype is no longer the internet phone app you used to know.

LinkedIn CEO Jeff Weiner said at once that LinkedIn would keep developing independently, while also remembering to stress that it shares a "common mission" with Microsoft, its new boss.

The China market is worth mentioning too. Almost as soon as the news came out, Shen Boyang, CEO of LinkedIn China, posted about it on WeChat Moments in the tone of an owner. He posted the same thing on Chitu, the professional networking product LinkedIn China runs itself, with one line added: "We are stronger now."

Incidentally, LinkedIn China is an independently run company, and LinkedIn is only one of its shareholders.

Cover image from Fastcompany and digitaltrends